Whether you can keep two cars in a Chapter 13 bankruptcy depends on a number of factors.
In general, you get to keep your property, including cars, in Chapter 13 bankruptcy. In return, you must repay your creditors (in full or in part) through your Chapter 13 repayment plan, which last between three and five years. (To learn more, see Chapter 13 Bankruptcy.)
However, there are some limitations to this general rule. Whether you can keep two cars in Chapter 13 will depend on whether the trustee and/or creditors object to your plan. If paying for two cars is not reasonable and necessary to your Chapter 13 reorganization, you may not be able to keep them. The trustee may also object if, after looking at the totality of your circumstances, that you did not file your plan in “good faith.” And if your equity in the cars is high enough, it may increase your plan payment to an unaffordable amount. Finally, even if you can legally keep your cars in Chapter 13, it might not be in your best interest to do so.
The role exemptions play in Chapter 13 differs from their role in Chapter 7. In Chapter 7, the trustee can sell your nonexempt property in order to repay unsecured creditors. In Chapter 13, you can keep your nonexempt property, but you must pay the equivalent of your nonexempt property into your Chapter 13 plan. This means that the more nonexempt property you have, the higher your plan payment must be. (To learn more, see The Chapter 13 Repayment Plan.)
If you have quite a bit of nonexempt equity in your two vehicles, the minimum amount you must pay through your plan will accordingly increase. Sometimes the additional car equity will bump up your plan payment so much, that you cannot realistically afford the payments.
If this happens, you need to give up one car to bring your payments back into line. Or , you might be able to keep it by selling some other exempt asset and applying the proceeds to the plan.
Part of the Chapter 13 trustee’s job is to make sure that your unsecured creditors (such as credit card companies, medical providers, etc) receive as much as possible under your plan. You must pay all of your projected disposable income over the plan period. How you calculate disposable income varies depending on whether your income is above or below the median income in your state. (To learn more, see Chapter 13: Your Disposable Income.)
Calculating disposable income is tricky, but here’s the gist of it: Start with your income and subtract certain allowed expenses along with payments on priority and secured debts, and some other things. You are allowed to deduct expenses for owning and operating a car. If your income is below the state median, you generally deduct your actual expense. If your income is above the state median, there are set amounts you can deduct for two cars.
The trustee or a creditor may object to your plan payment amount based on your projected disposable income calculation if you are paying for an additional car that you do not need or use. If this occurs, the court must find that your deductions are reasonable and necessary for your Chapter 13 reorganization for you to overcome the objection. The idea is that if keeping the extra car is not reasonable and necessary, the money you would otherwise use to pay for and maintain the car should instead be devoted to repaying unsecured creditors through your plan.
After you make the above calculations, you still must pass one more hurdle. Your Chapter 13 plan must be proposed in “good faith.” This means that the Court will look at the totality of your circumstances and factors such as your payment amount, percentage to be paid to your unsecured creditors, the duration of your plan, your employment history and prospects, the accuracy of your bankruptcy paperwork, and your motivation and sincerity in filing bankruptcy, among others.
If the trustee objects to your plan for lack of good faith or for unreasonable or unnecessary expenses, you can request a court hearing on the issue. At the hearing, you present reasons why your filing is in good faith and why both cars are reasonable and necessary for your reorganization (for example, both you and your spouse need a car to get to work). The court will consider factors such as your family size, commute distance, school and medical appointments, the make, model, and year of your vehicles, your monthly income, and the vehicles’ financing arrangements. Courts have found that newer, luxury vehicles are not reasonable or necessary for reorganization. And, proposing to keep and pay for two new vehicles could also be evidence of lack of good faith if unsecured creditors receive less than the full amount of what you owe to them.
Even if you will be able to keep two cars in Chapter 13 bankruptcy, doing so might not be the best decision for you. Be sure to consider whether your budget still allows for the cost of an additional vehicle, factoring in your monthly payment as well as costs for gas, oil changes, car insurance, and other car repairs and maintenance.
For more information, see our section on Your Car in Chapter 13 Bankruptcy.