The motor vehicle exemption helps you keep your car, truck, motorcycle, or van in Chapter 7 bankruptcy by protecting equity in a vehicle.
How Much Can You Protect With a Motor Vehicle Exemption?
You’ll need to be able to protect any equity in your with a bankruptcy exemption if you want to keep it. Here’s how exemptions work in bankruptcy. You’re allowed to exempt (keep) property that your state decides you’ll need to continue to work and maintain a household. But, in Chapter 7 bankruptcy, you must give up your non-exempt property anything you can’t protect with an exemption. The bankruptcy trustee; the person responsible for managing your case will sell your non-exempt property and use the proceeds to repay your unsecured creditors. You’ll find out how much equity you’ll be able to protect by reviewing your state’s exemption statutes.
How Much Is Your Car Worth?
Next, you’ll want to figure out how much you’d be able to get for your car. In your bankruptcy paperwork, you’ll be asked to report the “current” value of your vehicle, which is the amount you can sell it for considering its current age and condition (commonly known as the fair market value).
How Much Equity Do You Have in Your Car?
Once you know what your car is worth, you’ll use the value to determine how much equity is in it. Here’s how you do it.
• If you don’t have a car loan: If you own your car outright (you aren’t making payments on a car loan), the equity in your car is the same as the car’s value. For instance, if the vehicle is worth $2,000, your equity is also $2,000.
• If you have a car loan: The equity is the amount you’d have left over if you sold the car and paid off the car For instance, if you sold the car for $10,000 and paid off the $5,000 loan balance, you’d have $5,000 left to put in your pocket. The amount you’d get to keep is your equity. On the other hand, if you owe as much as the car is worth, you’ll have “zero” equity. If the vehicle is worth less than you owe, you’ll have “negative” equity.
Can You Protect the Equity With a Motor Vehicle Exemption?
Your next step is to compare the amount of your state’s motor vehicle exemption to your equity. If the exemption covers all of your equity, the trustee can’t sell your car. If you have unprotected equity, the trustee can sell your car, give you your exemption amount, and distribute the remaining amount to your creditors.
The trustee might also do the following:
• Abandon the vehicle: The trustee will often abandon the car if money wouldn’t be available for creditors after selling it. The trustee must pay off the loan, the amount of your exemption, the costs of sale, and the trustee’s commission. If little or nothing would remain, the trustee will abandon it, and you’ll get to keep it.
• Let you buy the vehicle: Many trustees will also allow you to pay for non-exempt vehicle equity. In Ella’s example, if she wanted to keep the Harley, it’s likely that she could negotiate a deal with the trustee to pay the amount the creditors would receive minus anticipated sales costs. The trustee might even give Ella a few months to pay.
Using Wildcard Exemptions to Protect Your Car
If the motor vehicle exemption doesn’t cover all of the vehicle equity, you might be able to use a wildcard exemption (if your state has one) to protect a certain amount of property of your choosing. A wildcard exemption protects any property of your choosing. In some states, you can also apply any unused portion of the homestead exemption to other assets. These exemptions can be added to your motor vehicle exemption to protect your car equity.
Car Loans: Additional Issues to Consider
Even if the trustee doesn’t sell your car to pay your creditors, you still have one more step to take if you have a car loan. If you don’t have a loan, you’re done. If you’re behind on your vehicle payments, the lender can take back the car, even if an exemption protects your equity. You might be able to save it one of two ways:
• Redeem the car: Pay the market value of the car to the lender in one lump sum.
• Reaffirm the car loan: Sign a new loan that will remain in force after the bankruptcy is over and make up the payments in the new agreement.
Understand, however, that while you have the right to enter a reaffirmation agreement if you’re current on your payments (and your lender might insist on it), the lender doesn’t have to agree to “modify” the loan in any way. So if you’re behind on your car loan before you file for Chapter 7 bankruptcy, and you don’t have the money to redeem it, you’ll be able to keep your car only if your lender is willing to work with you. Additionally, if you owe money on the car and would like to keep it, your loan will need to be current, and you’ll need to be able to continue making payments after the bankruptcy case. Also, you must indicate to the court whether you intend to reaffirm the debt, redeem the car, or surrender the car. When you file for bankruptcy, you can protect property that you’ll need to work and live by “exempting” it from your bankruptcy case. Each state decides the property its residents can keep (it will be listed in the state’s exemptions) and whether its residents can use the:
• state exemptions
• the federal exemptions, or
• choose the set that works best for you.
If you can exempt all of the equity in your car, you’ll be able to keep it. In fact, you’ll probably be able to keep it even if there’s a small amount of non-exempt equity because the car won’t be worth selling. In that case, the trustee will “abandon” it. If substantial non-exempt equity exists, however, here’s what the trustee will do:
• sell the vehicle
• pay you the exemption amount
• reimburse sales costs and fees
• take a percentage as a fee for selling the car, and
• distribute the remaining funds to your creditors.
Some trustees will allow you to pay the trustee for the non-exempt equity and keep the car. Usually, the price you’ll have to pay will be discounted by the amount the trustee saves in sales costs. You’ll have to use funds that aren’t part of the bankruptcy. Most people use post-filing earnings or get a gift or loan from a friend or relative.
Chapter 7 Options When You Have a Car Loan
You have a few other considerations that you’ll have to make if you financed the vehicle and are still making payments. First, you likely pledged the car as collateral when you took out the loan, making the loan a secured debt. If you don’t pay the loan as agreed, the lender’s security interest, or lien, allows the lender to repossess the vehicle. Because filing for bankruptcy doesn’t get rid of the lender’s lien, if you want to keep the car, you’ll have to continue making payments or pay for the car another way. And, as a practical matter, you should be current on your payments when filing because Chapter 7 doesn’t have a mechanism that will help you catch up on missed payments. If you can’t work out a deal with the lender, you’ll lose it to repossession.
Surrender the car
If you decide not to keep the car or you cannot afford the payments, you can surrender it (give it back). Surrendering the car will wipe out your entire debt liability. The creditor will either have to wait until your bankruptcy before repossessing the car or file a motion with the court asking the court to lift the automatic stay that prevents collection actions.
Reaffirm the loan
If you reaffirm your car loan, you’ll sign a contract with the creditor agreeing to continue paying for the car and you’ll remain liable on the debt. If you sign a reaffirmation agreement, you’ll be bound by the agreement and liable for the debt, despite the bankruptcy discharge. As part of the process, you’ll have to show that you can afford the payment; otherwise, the court will disapprove the agreement, and the creditor will repossess the vehicle.
Redeem the car
If you choose to redeem the car, you must offer to pay the car lender the current market value of the vehicle in a lump sum payment. For instance, if you owe $8,000, but the car is worth only $5,000, you can pay a lump sum of $5,000 and wipe out the remaining $3,000 in your bankruptcy. If you and the creditor cannot agree on the value, the court will decide. This option makes sense if the value of the car is less than what you owe.
Vehicle Equity as an Asset in Bankruptcy
Chapter 7 bankruptcy is sometimes known as liquidation bankruptcy, because in a Chapter 7 case the bankruptcy trustee can take non-exempt property and sell it for the benefit of creditors. That sounds a little scary to many people considering bankruptcy, but in fact most people who file for Chapter 7 don’t lose any property. That’s because the law provides a set of exemptions–a list of property that creditors can’t touch, even in bankruptcy. These exemptions differ from state to state. Keep in mind, though, that the important number for exemption purposes is not the value of the automobile. Instead, it is the equity in the vehicle.
Cars Serving as Security for a Loan
The other issue many people seeking to keep vehicles in a Chapter 7 bankruptcy case must address is any outstanding loan balance. If the car serves as security for a loan, the bankruptcy petitioner obviously can’t just discharge the outstanding debt and keep the car for free. There are generally three options available to a person who enters Chapter 7 bankruptcy with a secured automobile. First, the bankruptcy filer may choose to surrender the vehicle. Even those who need a car to get around sometimes choose this option. Some reasons people surrender vehicles in Chapter 7 bankruptcy include:
• Knowing or fearing that they will be unable to keep up payments after the bankruptcy, and
• Opting to get out from under a loan when the remaining balance is greater than the value of the car
When a vehicle is surrendered in bankruptcy, the outstanding loan balance becomes unsecured, and so can be discharged in bankruptcy. Depending on finances, keeping the car and continuing to pay on the loan may also be an option. There are two ways this can happen. One is to simply continue to make payments. However, this option isn’t always available. Some lenders will not allow a bankruptcy filer to keep the car and continue to make payments without a formal agreement. Others may continue to accept payments but stop sending statements and reporting to credit reporting agencies. The more formal way to continue paying down the loan and keep the car is reaffirmation. Reaffirmation is essentially a refreshing of the contract with the lender. For a bankruptcy petitioner who wishes to keep a car and plans to continue making payments, this may seem like no big deal. It’s just an agreement to follow the plan. But reaffirmation can be risky. It’s an agreement that the debt won’t be discharged in bankruptcy. That means if new issues arise after bankruptcy and the borrower can’t keep up payments, the car can be repossessed. But, any deficiency balance will remain, potentially leading to a lawsuit, judgment, and even wage garnishment. Reaffirmation can also be a challenge because it sometimes must be approved by the court. That means either that the bankruptcy attorney must represent to the court that he or she has assessed the situation and believes the debtor can afford to continue to make payments on the vehicle, or that the petitioner must appear at a hearing and convince the judge that the agreement is realistic. The third option is to redeem the vehicle. That simply means to purchase the vehicle outright from the lender, possibly for less than the outstanding balance of the loan. The amount required to redeem the vehicle is “the amount of the allowed secured claim.” In practice, that means the lower of the outstanding loan balance or the value of the car. Redemption is not common. People filing for Chapter 7 bankruptcy generally do not have enough available cash to make a significant lump-sum payment to their automobile lender.
When you need to file for chapter 7 bankruptcy, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506