Whether you can keep your paid-off car in Chapter 7 bankruptcy depends on your car's market value and how much of it your state's motor vehicle exemption protects.
You can keep your paid-off car in Chapter 7 bankruptcy if your state's motor vehicle exemption equals or exceeds the car's fair market value. If the exemption falls short, the bankruptcy trustee can sell the car and pay you the exempt amount. Here's how to determine where you stand.
How Motor Vehicle Exemptions Protect Your Car
A motor vehicle exemption is a state-law protection that shields a set dollar amount of your car's equity from the bankruptcy trustee. Almost every state has one, though the amounts vary widely—some are as low as $500, and others reach $15,000 or more. If your state also offers a wildcard exemption, you can stack that amount on top of your motor vehicle exemption to increase your protection. (11 U.S.C. § 522.)
To find your state's current motor vehicle and wildcard exemption amounts, see Bankruptcy Exemptions—What Do I Keep When I File for Bankruptcy?
How to Calculate Whether You Can Keep Your Car
Two numbers determine whether your car is safe: its fair market value and your state's exemption amount. Here's how to find both.
Find Your Car's Fair Market Value
The trustee uses replacement value. Replacement value isn’t what you paid, but rather what a buyer would pay for a similar vehicle given its age and condition. To find it, try using Kelley Blue Book (KBB) or the NADA Guides. If the value doesn’t seem accurate, perhaps because your car is unique or unusual in some way, you might need to have it appraised.
Find Your State's Motor Vehicle Exemption
Look up the dollar amount your state allows for motor vehicles. Add any available wildcard exemption to that figure to get your total protection amount.
Do the Math
If your total exemption equals or exceeds your car's replacement value, you can keep it. If the exemption falls well short of the car's value, the trustee will likely sell it, pay you the exempt amount, and distribute the rest to your creditors.
When the Trustee Won't Sell Even If Your Car Isn't Fully Exempt
A gap between your car's value and your exemption amount doesn't automatically mean you'll lose the vehicle. When a trustee sells a car, the proceeds must cover the exemption payment to you, the costs of an auction sale, and the trustee's commission. If little or nothing remains after those deductions, the trustee is unlikely to pursue the sale. It simply wouldn't benefit your creditors enough to be worthwhile. (11 U.S.C. § 704.)
What If Your Car Has Too Much Equity to Protect?
If your car is worth significantly more than your state's exemption allows, the trustee will likely sell it. You'll receive the exemption amount in cash, and the remaining proceeds go to your creditors. In some situations, a trustee may give you the option to pay the nonexempt portion directly rather than forcing a sale—effectively letting you "buy back" the equity. It's worth asking a bankruptcy attorney whether that option is available in your district.
If you want to keep a car with too much equity, filing under Chapter 13 might be a better option. In a Chapter 13 case, the trustee doesn't sell your property. Instead, you pay creditors the value of your nonexempt assets through a three- to five-year repayment plan, which lets you keep the vehicle.
How Chapter 7 Bankruptcy Works
In Chapter 7 bankruptcy, most or all of your qualifying debts are discharged. In exchange, the bankruptcy trustee is authorized to sell your nonexempt property and use the proceeds to repay your unsecured creditors. Property you can protect using a bankruptcy exemption is off-limits to the trustee. Because a paid-off car has no loan against it, the entire vehicle value counts as equity, making the exemption calculation the only factor in whether you keep it.
Getting Legal Help
Exemption amounts and the rules for applying them vary significantly by state, and making the wrong call can cost you your vehicle. Before you file, consult a local bankruptcy attorney who knows your district's practices and can help you calculate exactly how much of your car's equity you can protect.
Take our bankruptcy quiz to identify potential issues and learn how to best proceed with your bankruptcy case.
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