A major concern for many consumers considering Chapter 7 bankruptcy is whether they will be allowed to keep a car that they own free and clear. If you don't have a car loan, keeping your car in Chapter 7 bankruptcy depends largely on how much the car is worth and the amount of the exemption you may claim.
The Car Exemption in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, you discharge all or most of your debts. In return, you must give up nonexempt property. The bankruptcy trustee sells this property to pay your creditors. Each state has a list of exempt property. Some states allow you to use the federal bankruptcy exemptions instead of the state exemptions.
The motor vehicle exemption. Most states provide an exemption up to a certain dollar amount for the debtor's car. In some states the exempted amount is quite low. In others, the exemption can be as high as $15,000, and even more if the car is outfitted for use by a person with a disability. Currently, the federal bankruptcy exemption for motor vehicles is $3,450. (To find out the motor vehicle exemption in your state, see Bankruptcy Exemptions: What Do I Keep When I File for Bankruptcy?)
Using a wildcard exemption. Many states also have a wildcard exemption that can be applied towards any property. You can add this to the applicable motor vehicle exemption if necessary. Or, if you have two cars and only one is covered by the motor vehicle exemption, you can use the wildcard to exempt the other card.
Does the Exemption Cover the Value of Your Car?
The amount of the allowed exemption on a car is very important in determining whether a debtor will be able to retain possession of the vehicle. If the value of the car exceeds the amount of the exemption, there is a chance that bankruptcy trustee will seize the car, sell it, and distribute the net proceeds of the sale to the debtor’s unsecured creditors. If the trustee exercises his or her right to sell the vehicle, the debtor will be paid the value of the claimed exemption from the proceeds of the sale.
On the other hand, if the difference between the value of the car and the amount of the claimed exemption is small and if after factoring in the costs of the sale, there will be little or no money left for distribution to unsecured creditors, it’s likely that the trustee will choose to abandon his or her interest in the car and the debtor will be allowed to keep it.
How Is the Value of the Car Determined?
The important figure for determining whether your used car is exempt is the "replacement value" of your car. This is what you would receive for your car if you sold it on the open market, taking into consideration its age and condition.
For a quick idea of what your car is worth, you can check the Kelley Blue Book at www.kb.org. A safer bet is the average retail price for your car listed by the National Automobile Dealers Association at www.nada.com.