Everyone needs transportation to get to work, take children to school, attend medical appointments, and do other pressing errands. But your belongings—including your car—must meet bankruptcy requirements. We explain how your answers to these two questions will determine whether you can keep your vehicle in bankruptcy:
If your answer to either of these questions is "no," a repayment plan in a Chapter 13 case might provide you with the means to keep your car and bring your payments current.
You'll also find a handy vehicle calculation shortcut at the end of the article.
When finished, consider exploring how bankruptcy works and learning other helpful things about bankruptcy. And check out our quick ten-question bankruptcy quiz—it can help you spot potential bankruptcy issues fast.
Everyone who owns a car and files for bankruptcy will need to calculate their vehicle's equity. Here's how to calculate vehicle equity for bankruptcy:
All the equity you can protect is known as "exempt equity." Any portion not covered by an exemption is "nonexempt equity."
For example, let's say Robert can exempt up to $4,000 of equity in a motor vehicle and he owns a motorcycle with a value of $9,500. He owes the bank $7,300. When you subtract $7,300 from $9,500, you'll see that Robert's equity, or his ownership interest, is $2,200. Under state law, Robert can exempt up to $4,000 in equity. Because his equity in the motorcycle is less than the $4,000 maximum exemption available to him, his motorcycle will be safe if he files for bankruptcy.
Read through each situation to determine the likelihood of keeping your car. You aren't likely to lose it if your situation matches one of the scenarios.
You can keep your car in Chapters 7 or 13 in these situations:
You can keep your car in Chapter 7 in this situation:
You can keep your car in Chapter 13 in this situation:
Here are some examples that show how equity and exemptions are applied in Chapter 7 and Chapter 13 cases.
Example 1. According to NADA.com, the retail value of Kayla's SUV is $12,500. She owes $9,200 on it. The equity is $3,300 ($12,500 – $9,200 = $3,300). Kayla's in luck. The vehicle exemption amount in her state is $4,200, more than what she needs to protect her $3,300 in equity. If she files a Chapter 7 case, the trustee will not sell her SUV. If she chooses a Chapter 13 case instead, she'll be fine as long as she continues to make her car payments.
Example 2. Hannah has been trying to sell her pickup truck for a few months. She knows that similar truck models are selling for $7,600. When Hannah decides to file a Chapter 7 bankruptcy case, the bank quotes her a payoff of $8,050. The value of the truck is less than what she owes on it. Therefore, she has no equity that needs to be exempted. The Chapter 7 trustee will not be interested in selling her truck. In a Chapter 13 case, Hannah could also keep her truck as long as she can afford the payments.
You'll likely lose your car in Chapter 7 if you can't protect all of the vehicle's equity. It will depend on how much equity is available to pay creditors.
Here's the test: If a reasonable amount would remain for creditors after giving you the exemption amount, paying off any vehicle loans, and deducting sales costs, the Chapter 7 trustee will sell the car. If not, the trustee won't waste time or effort selling your vehicle. Unfortunately, how much is "reasonable" depends on the type of vehicle, the jurisdiction where you filed your case, the trustee's practice, and even the state of the economy. A local bankruptcy attorney can help you figure out whether a trustee would likely sell your car to benefit your creditors.
You might also lose your car if you're behind on your car payment when you file for Chapter 7. The lien rights you gave the lender let the creditor repossess the vehicle when you fall behind, and Chapter 7 doesn't have a repayment plan provision that will help you catch up on the payments.
Example 3. Darrin owns a sports car worth $27,000. After deducting the $17,500 balance on his bank loan, his equity equals $9,500. The state allows a motor vehicle exemption of just $3,000. That leaves a nonexempt portion of $6,500, an amount almost certain to interest a Chapter 7 trustee and creditors. If Darrin opted to file a Chapter 13 instead, he could keep the car, but he would pay the nonexempt portion of $6,500 to his unsecured creditors through his Chapter 13 plan.
This shortcut will help you determine if you can keep a car in bankruptcy.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.