Many people worry that they’ll lose everything if they file for Chapter 7 bankruptcy, but it’s not the case. Exemption laws allow you to “exempt,” or protect property in bankruptcy, including a modest car (truck, motorcycle, or van). You’ll need to be able to protect any equity in your with a bankruptcy exemption if you want to keep it. 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 nonexempt property anything you can’t protect with an exemption. The bankruptcy trustee the person responsible for managing your case will sell your nonexempt property and use the proceeds to repay your unsecured creditors. 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). You can find values on websites such as Kelley Blue Book the National Auto Dealers Association. Your bankruptcy trustee will likely favor one of the two websites and expect you to provide a printout from that site as proof of your vehicle’s 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.
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. For instance, in Ella’s example above, if Ella’s Harley were worth only $6,000, nothing of consequence would be left for creditors after deducting all the costs, so the trustee would likely abandon it rather than go through the meaningless effort of selling it.
• Let you buy the vehicle. Many trustees will also allow you to pay for nonexempt 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.
Example: Hannah has $4,000 in equity in her car. Her state allows debtors to exempt up to $3,500 in a car. It also has a $1,000 wildcard exemption. Hannah can protect her car by using $3,500 of the motor vehicle exemption and $500 of the wildcard exemption.
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. Keeping a car in Chapter 7 bankruptcy is a top priority for almost all filers. Your ability to do so will depend on:
• the vehicle equity
• the exemptions available to you to protect it
• if you’re current on your payment, and
• whether you can stay current after bankruptcy.
Protecting Car Equity in Chapter 7
A Chapter 7 bankruptcy isn’t intended to deprive you of all of your property. Bankruptcy laws, called exemptions, let you keep a certain amount of your property to make a fresh start. Almost all people need a car to get to work, and most states have a motor vehicle exemption that will let you keep a modest vehicle.
Exemptions in Chapter 7 Bankruptcy
Each state has a set of exemptions, and the protections vary widely. Some states even allow a filer to choose between the state and federal bankruptcy exemption system. A filer can use whichever system will work best. While you keep exempt property, what will happen to your nonexempt property not protected by an exemption will depend on the chapter you file. In Chapter 7, the trustee sells your nonexempt property for the benefit of your creditors. If your property is exempt, the Chapter 7 bankruptcy trustee can’t take it. Learn more about your property and exemptions. Whether you’ll be able to keep your car will depend on the exemption amount allowed by your state, as well as the amount of equity in it. For instance, if you own a car worth $5,000 and your state’s motor vehicle exemption is $7,000, the vehicle will be fully protected. If you have a car loan, the exemption amount only needs to protect the amount of equity you have in it—not the entire value. So if you have a car worth $15,000, but you owe $10,000, then you only have $5,000 of equity in the vehicle. You’ll be able to protect it if your car exemption is $5,000 or higher. In Chapter 7 bankruptcy, here’s what the Chapter 7 bankruptcy trustee appointed to your case will do if you can’t protect all of the vehicle’s equity:
• sell the car
• return the exemption amount to you
• deducting sales costs and the trustee’s fee, and
• distribute the remaining proceeds to your creditors.
Your creditors will receive the remainder after the trustee deducts sales costs and fees. The trustee won’t sell the car if, after deducting these costs, nothing remained for creditors. This process is known as abandoning the property.
Example: Suppose you own a car outright worth $5,000, so your equity is $5,000. Your state allows a $6,000 car exemption. You can fully protect the equity and keep your vehicle.
Example: Suppose again that you own a car with $5,000 in equity. However, your state only allows a $2,000 car exemption and doesn’t have a wildcard exemption. The bankruptcy trustee will take your car and sell it. From the sales proceeds, the trustee will pay you your $2,000 exemption amount. The trustee will deduct the amount remaining after subtracting sales costs and the trustee fee.
Using a Wildcard Exemption to Keep Your Car
Many states have a “wildcard” exemption that you can use towards any property. If the motor vehicle exemption is not enough to cover your car equity, you might be able to protect the entire amount using a wildcard exemption.
If You Have a Car Loan
The trustee won’t sell your car unless there’s enough equity to pay off the car loan balance, give you the exemption amount, and still have funds for creditors after paying fees and costs. Even if there isn’t enough money in the car to justify selling it, you’ll face another hurdle—you’ll need to be current on payments. Most people don’t have the cash to buy a car outright. In exchange for the loan, the lender takes an ownership interest in the vehicle using a lien. The vehicle becomes collateral for the loan. If you don’t pay according to the contract terms, the lender has the right to recover the car. Filing for bankruptcy doesn’t remove a car lien. If your payments aren’t current when you file, the lender can make a motion asking the bankruptcy court to allow repossession or wait to get the vehicle until the automatic stay gets lifted when the Chapter 7 case ends. In some cases, you might be able to work out a deal with the lender when reaffirming the loan (more below), but you can’t depend on it. Chapter 7 doesn’t have a mechanism to help you get caught up on a payment. Unlike Chapter 7, Chapter 13 allows you to make up missed payments over time so you can keep the vehicle.
Example: Suppose you have a car worth $5,000 but you still owe $6,000 on your auto loan. Because you owe more than it’s worth and the lender gets paid first, the trustee won’t take the car. You’ll be able to keep it as long as your payments are current.
Example: Suppose your car is worth $10,000. You owe $4,000 on your car loan, and you’re behind four payments. You’ll need a motor vehicle or wildcard exemption of at least $6,000 to protect the equity and prevent the trustee from selling it. But the lender can still take the car back because of the late payments. In this case, you might want to consider Chapter 13. It can help you catch up on payments over time and can keep the car. It’s likely the better option. If you can’t exempt all of the car equity, you still might be able to keep it. If little remains for creditors after deducting the sales costs and the trustee’s fee, the trustee will likely abandon (decide not to sell) the car. Also, some trustees will let you pay to keep your car. For instance, the trustee might agree to give you a few months to pay for the equity minus sales costs. Debtors usually use the income earned after the bankruptcy or get a loan from friends or family.
Reaffirming Your Car Loan
In addition to making your regular car payments, your lender could require you to “reaffirm” your car loan. Even though the car lender’s security interest in the vehicle is unaffected by your bankruptcy, a Chapter 7 discharge eliminates your liability to pay the contract price. If the lender repossesses the car and doesn’t get enough at auction to cover the outstanding balance (deficiency), the lender can’t sue you for it. The downsides to not signing a reaffirmation are that your payments won’t show up on your credit report, and the lender can take the car back for any reason even if you’re current on the payments.
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— Ascent Law (@AscentLaw) August 1, 2022