The decision to file for bankruptcy is difficult and complex. What chapter do I file? When is the best time to file? Should I file at all?
Surprisingly, the answer may sometimes turn on whether you will be allowed to keep your car. Most people today need a car to survive: work, school, and kids to name a few. Therefore, it is critical to determine whether you will or will not be permitted to keep your car before filing for bankruptcy. The answer to this question is dependent upon a number of different factors, including what chapter of bankruptcy you file, where you file, and whether your car is financed, leased, or owned.
1. Can the Bankruptcy Trustee sell my car?
Seriously? The Bankruptcy Trustee can sell my car?
If you file for Chapter 7, a Bankruptcy Trustee will be appointed to your case. One of the Trustee’s responsibilities is to determine what assets you own and whether any of these assets may be sold by the Trustee, using the proceeds to repay your creditors. This can include your car.
2. Can the Bankruptcy Code protect certain assets from the Trustee?
This is good news! The purpose of a Chapter 7 is to provide you with a fresh start and free you from the burden of your current debt. With that objective in mind, the Bankruptcy Code allows you to keep certain property, and protects it from the Bankruptcy Trustee. This includes some of the equity in your car. The property and equity in property that is protected from the Trustee are known as “Exemptions.”
3. Do Bankruptcy Exemptions protect my car?
If you file a Chapter 7, you may protect (i.e. exempt) a certain amount of “equity” in your car.
The exemption amount is dependent upon the state where your bankruptcy will be filed and whether you elect the federal or state exemption, if you live in a state that gives you that option. Your Bankruptcy lawyer will you make these decisions. If the equity in your car is more than your chosen Exemption, the Trustee may sell your car to recover the excess equity amount. If, however, the amount of equity available is equal to or less than your Exemption, the Trustee will not sell your car.
4. How do I determine the amount of equity in a car I own?
The amount of equity in a car you own is equal to the value of your interest in the car on the day you file for bankruptcy.
For example, if you own your car and its value is $10,000, the amount of equity is $10,000. While an appraisal is the best evidence of the “true” value, in practice most Trustees accept the Kelly Blue Book or a valuation, usually obtainable online.
5. What if I am financing to own my car?
If you borrowed money to own your car (financing), the amount of equity in your car is equal to the value of the car less the amount you owe to pay off the loan. For example, if your car is valued at $10,000 and you owe $8,000, the amount of equity is $2,000.
6. What if the Bankruptcy Exemptions are insufficient to protect my car?
If your Exemption is not high enough to protect all of the equity available in your car, your car may still be protected.
Depending upon the amount of equity above the exemption amount, the Trustee may elect to abandon his or her interest in your car anyway, if the leftover amount is relatively small. This is because the Trustee will have to incur expenses to sell your car. If the cost of selling your car, plus the exemption amount, will not yield any money for creditors, it is unlikely the Trustee will want to sell your car.
For example, if the equity in your car is $5,000 and the available exemption totals $4,500, it is not likely the Trustee will sell your car to realize $500, given the cost to sell the car.
7. Can my lender or finance company repossess my car?
You have determined that you can protect/exempt all of the equity in the car from Trustee. Case closed! The car is yours…or is it? Not so fast.
If you are financing your car, your lender/finance company may still be permitted to repossess the car even if you are current on your payments.
How can this be? While a Chapter 7 will release you of the obligation to pay most of your unsecured debts, a secured creditor is entitled to either be paid in full or have its collateral returned. A secured creditor is a creditor who has a lien on any of your property. The most common secured creditors are mortgage companies and car finance companies.
8. How do Reaffirmation and Redemption affect my car?
If you are financing your car, it is likely that the lender has a lien on your car. While a Chapter 7 Bankruptcy may technically release your obligation to pay your lender the balance of what you may owe on the car, the lender is entitled to repossess your car if you fail to pay the full balance owed on the loan.
Therefore, if you want to keep your car, either you must enter into a reaffirmation agreement with the lender, or you must redeem the car by paying the lender, in one lump sum, the full outstanding balance owed on the car.
If you elect to reaffirm the debt, and the lender agrees, you will be obligated to make the payments on your car just like you did prior to your Chapter 7. In many jurisdictions, in order to reaffirm a debt, you must demonstrate to the Bankruptcy Court that you will have the financial ability to make the future payments on that obligation.
A cautionary pause: While most lenders would much rather have you sign a reaffirmation agreement, you cannot compel the Lender to sign. Therefore, you may have to stand ready to redeem the car, convert your case to a Chapter 13, or simply file a Chapter 13 to begin with. Unlike in a Chapter 7, under a Chapter 13 plan you can force the Lender to accept regular payments on the balance of what you owe in exchange for keeping your car.
9. What if I am leasing my car?
Typically, the Trustee will not be interested in your car if you are leasing your car because you do not own it.
However, the fact that you lease does not mean you automatically keep your car. You have 60 days from filing a Chapter 7 Bankruptcy filing to “assume” the car lease, meaning to agree to continue to make your lease payments and keep the lease agreement in effect. While you cannot force the leasing company to allow you to assume the lease (and thereby keep your car), in most cases, if you are current or close to being current on the lease payments at the time you file for bankruptcy, the leasing company will consent.
The above is for informational purposes only and is not intended to be legal advice nor is it intended to create an attorney client relationship with anyone reviewing this material. There is no substitute for consulting an experienced bankruptcy attorney. The facts of your particular circumstances may lead an attorney to conclude differently than the information provided herein.