keep your car in bankruptcyThe ability to keep your car in bankruptcy may actually be a primary factor in whether you decide to file or not.  And whether you can keep your car in bankruptcy will depend on a number of factors.  Probably the most important initial factor is whether the you are considering a chapter 7 (liquidation) vs. a chapter 13 (reorganization).

Vehicles In Chapter 7

In chapter 7, you’ll often be able to keep your car if 1) you’re current on payments, and 2) there is no non-exempt equity that could be used to pay creditors.

Whether there is non-exempt equity depends on three factors:

  1. the balance owed on the vehicle loan;
  2. fair market value of the vehicle, and
  3. whether any available equity (the vehicle value minus the loan balance) is covered by an applicable exemption.

A Quick Explanation on Exemptions

Individuals are permitted certain “exemptions” in bankruptcy with regards to various types of assets, including vehicles.  The existence  of exemptions is based on the premise that you should not have all of your assets liquidated just because you filed bankruptcy.  Even though some assets may be liquidated to pay creditors, you should not be left destitute after a bankruptcy filing.  This objective is accomplished by allowing debtors a certain level of exemptions.

Understanding When a Chapter 7 Trustee Will Liquidate Your Vehicle?

Only in chapter 7 can a trustee actually sell your assets. If there is sufficient equity in a vehicle, beyond the value of any permissible exemption (which varies depending on your state), you may not be able to keep your car in bankruptcy. The trustee may actually sell it, and use the net equity to pay your creditors. Equity is calculated by subtracting the outstanding loan balance from the value of the vehicle. If the likely net proceeds exceed the permissible exemption, then there is remaining value for creditors, and thus the trustee might liquidate the vehicle.   Here are a couple hypotheticals to help explain the concept:

Hypo 1:

Vehicle Value:  $10,000

Loan Secured by Vehicle:  $6,000

Equity in Vehicle:  $5,000

Exemption Available for Vehicle:  $3,500

Remaining Value for Creditors:  $1,500

In this scenario, the trustee could sell the vehicle, keep the $1,500 to pay to creditors, and return the $3,500 exempted funds to the debtor.  Realistically, the trustee may opt not to sell the vehicle because, after the costs of sale, there may be insufficient net funds left to pay creditors.  A trustee may also permit a debtor to “buy back” the $1,500 non-exempt equity.  In that situation, the Debtor would need to come up with the $1,500 in order to prevent the sale.

Hypo 2:

Vehicle Value:  $10,000

Loans Secure by Vehicle:  $8,000

Equity in Vehicle:  $2,000

Exemption Available for Vehicle:  $3,500

Remaining Value for Creditors:  $0

In this scenario, the trustee would not sell the vehicle because there is no non-exempt equity, and there would be no remaining value for creditors.  This is a good example displaying how exemptions permit a debtor to retain certain assets in bankruptcy.

A Potential Additional Obstacle  – The Reaffirmation Agreement [Ch. 7 Only]

A minority of creditors may still require the Debtor to sign what is called a Reaffirmation Agreement, in order to retain the vehicle. It’s surprising, but certain creditors will threaten to repossess a vehicle, even if a Debtor is entirely current on vehicle payments.  They may even repossess when they would lose money by doing so.  In order to prevent the repossession, the vehicle lender will require the Debtor reaffirm the debt.  Reaffirming means that the debtor agrees to remain personally liability on this specific debt, even after most other debts are discharged in bankruptcy. The Debtor is essentially faced with a dilemma:  Sign the Reaffirmation Agreement, or risk losing the vehicle.  In many instances, signing the Reaffirmation Agreement is not in the client’s best interest, but neither is losing the vehicle. But there is, however, a third option:  consider filing chapter 13, instead.

Vehicles In Chapter 13

Chapter 13 is considered a reorganization. This means as least a small portion of debts are being repaid over a fixed period of time.  The good news is this:  in most instances, you’ll be able to keep your car in bankruptcy, even if there is some non-exempt equity (see Hypo 1 above, as an example). In addition, chapter 13 may actually allow you to adjust the terms of your vehicle loan. And in chapter 13, the chapter 13 trustee has no ability to liquidate any of your assets.  Instead, you retain all your assets, and simply agree to pay some partial amount to creditors over time.

Why Chapter 13 Might Make It Easier to Keep Your Vehicle in Bankruptcy

Chapter 13’s advantages relating to vehicle loans are as follows:

  1. The interest rate on vehicle loans can often be reduced;
  2. The loan repayment period can often be extended (to as much as 5 years from the bankruptcy filing date);
  3. In certain instances, the required principal on the vehicle loan can actually be reduced;
  4. The vehicle lender cannot present the Debtor with the Reaffirmation Agreement Dilemma; and
  5. Even if you have a non-exempt equity in your vehicle, you may be able to keep your vehicle, so long as the amount you ultimately pay to creditors is greater than the net value of the the non-exempt equity.

As noted, chapter 13 can often allow you to keep your car in bankruptcy. However, with most such legal issues, we advise finding a knowledgeable bankruptcy attorney to help you evaluate your options.

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