If you’re considering filing for bankruptcy to get out of credit card debt, you may be worried that you’ll lose all your property if you file Chapter 7 bankruptcy. Generally, this isn’t the case. Most people who file Chapter 7 bankruptcy are able to keep many types of personal property and still get their debt eliminated.
Bankruptcy exemptions protect property from being seized. For instance, you may be able to keep your car if the equity in the vehicle falls under an exemption. An experienced bankruptcy attorney can help you navigate the terms and conditions of a bankruptcy filing, exemptions, and any other options that may be open to you.
There are several types of bankruptcy that people can pursue, but below, we will discuss how you can file for Chapter 7 bankruptcy and keep your car safe from creditors.
To protect your vehicle in a Chapter 7 bankruptcy, you’ll need to ensure that any equity in your car is covered by a bankruptcy exemption. Bankruptcy exemptions can be found within the Bankruptcy Code.
Bankruptcy exemptions determine what property you can keep. If your property falls within an exemption, you can keep it even though you’ve filed for bankruptcy. Nonexempt property, on the other hand, is property that doesn’t fall under an exemption. Nonexempt property can be sold to pay off your creditors in a Chapter 7 bankruptcy.
Typically, a bankruptcy trustee will be assigned to your bankruptcy case to oversee the process. The bankruptcy trustee determines if your property is available for creditors, and, if necessary, sells off any nonexempt property to pay your creditors.
To find out whether a vehicle falls under a bankruptcy exemption, you must first determine its value. You’ll be asked to supply this in your bankruptcy petition. You may not know what your car is worth off the top of your head, but you can find its value by doing a quick online search on the Kelley Blue Book website, KBB.com.
The website will ask you to plug in the year, make, model, mileage, and condition of your car. Once you’re done, Kelley Blue Book will generate a report telling you the fair market value of your vehicle.
Once you know what your vehicle is worth, you’ll need to determine how much equity you have. Equity is the value of the vehicle minus any outstanding liens or car loans. If you don’t owe anything on your vehicle and don’t have any car payments, your equity is whatever the vehicle is worth. For example, if your Kelley Blue Book report calculated your vehicle's worth at $5,000, then your equity is $5,000.
If, on the other hand, you have a car loan, you’ll need to subtract the loan amount from the value of the car to arrive at your equity. For instance, if your car’s fair market value is $10,000, but you owe $7,000 on the car loan, your equity is $3,000.
The amount you would walk away with after selling your car is the amount of your equity. In some cases, you may not have any equity in your car. If your car has a fair market value of $10,000, but you owe $20,000 on your car loan, you don’t have any equity in your vehicle.
The next step is crucial in determining whether you can keep your vehicle after a bankruptcy filing. As mentioned above, to keep your car, it must fall under an exemption. If you file for bankruptcy, you’ll need to determine whether to use your state’s exemptions or federal exemptions.
Some states will allow you to choose which exemptions to use, while other states will require you to use their specific exemptions. Determining which set of exemptions to use is crucial. Otherwise, you risk having the bankruptcy trustee take your property and sell it. An experienced bankruptcy attorney can help you make this determination and for a plan of action.
In some cases, the bankruptcy trustee may elect to abandon the vehicle even if there is nonexempt equity in the car. This typically happens when the cost of selling the vehicle is more than what the creditors would get after it’s sold.
Further, a trustee may allow you to buy the vehicle from them. When this happens, the trustee will allow you to pay the nonexempt portion so you can keep your vehicle.
To determine if your car falls under an exemption, compare the amount of your state’s motor vehicle exemption to the equity in your car. If there’s no equity left after you apply the exemption, you can keep your car. If, however, there is equity, the bankruptcy trustee may elect to sell your vehicle to pay off your creditors.
Say, for instance, you owe $5,000 on a vehicle that’s worth $10,000. That means you have $5,000 in equity, so you’ll need to ensure that your state’s exemption laws will cover that remaining amount.
The wildcard exemption can be used to exempt property that wouldn’t be protected otherwise. As of July 19, 2020, the wildcard exemption amount is $13,900.
The wildcard exemption lets you choose the property you want to protect. You can use it to protect real estate, your vehicle, or personal property. The wildcard exemption can be used when your state’s motor vehicle exemption amount isn’t enough to cover the equity in your vehicle.
Let’s say you have $5,000 equity in your car, and your state’s motor vehicle exemption is $2,000. That motor vehicle exemption wouldn’t be enough to cover your equity. But you could use part of your wildcard exemption to exempt the nonexempt portion of your vehicle.
Keep in mind, however, that not all states allow individuals who are filing bankruptcy to use the wildcard exemption.
If you’re at risk of having your car repossessed, you can use the bankruptcy process as a debt-relief option. Often, individuals are surprised to learn that even though they don’t have a car anymore, they may still be responsible for the amount that’s left on the car loan after the lender auctions off the car. (This is also known as the deficiency amount). A bankruptcy discharge can eliminate your liability on a car that has been repossessed.
If your car hasn't been repossessed, but you’re worried it will be, you can file for bankruptcy to prevent a lender from repossessing it. When you file, this triggers an automatic stay, preventing creditors and lenders from collecting against you. This means car lenders won’t be able to repossess your vehicle without first obtaining permission from the Bankruptcy Court.
Below are some other options you may have if you want to keep your car.
If you’re behind on your car loan, you can ask your lender to negotiate a new contract.
When you redeem your car, you buy back the property from the creditor at the negotiated price. Typically, the lender will require one lump-sum payment.
To redeem your vehicle in a Chapter 7 bankruptcy, the property must be exempt, and the debt must be used for a personal purpose. If your creditor allows you to redeem your property, they must accept your offer as payment in full, even if you still have an outstanding balance.
The problem with this plan is that many people in Chapter 7 bankruptcy can find it difficult to come up with a lump-sum payment.
A cramdown can be a useful tool if you owe more on your secured debts than the amount your property is worth. A cramdown in a Chapter 13 bankruptcy or a Chapter 7 bankruptcy allows you to reduce the amount you owe to the current value of the property’s collateral.
For example, if you own a car worth $10,000 but your loan balance is $20,000, then you can cram down your loan to $10,000 (the value of your car) through bankruptcy filing. If you file for a Chapter 13 repayment plan, a cramdown can reduce the interest rate and stretch out payments over the loan term, usually 3-5 years.
There are restrictions on when a cramdown can be used, so consult an attorney to understand the regulations that apply. To prevent people from buying expensive items right before their bankruptcy and cramming down their loans, Congress adopted time limits. If you want to cram down your car loan, you must have bought the car at least 910 days before filing for bankruptcy.
If you want to keep your car after bankruptcy, your lender may ask you to sign a reaffirmation agreement. In a reaffirmation agreement, the debtor agrees to remain responsible for paying on the car loan. If you enter into such an agreement, you will continue to make your monthly payments on the loan.
Most car lenders will require you to be current on the loan to enter into a reaffirmation agreement. Before you sign, you should contact a bankruptcy lawyer to determine if a reaffirmation agreement is in your best interest.
A reaffirmation agreement will leave you personally liable for the car loan. This means that, even though you file for bankruptcy, you will still be legally responsible for the debt under the payment plan. You should only consider signing a reaffirmation agreement if:
If you can’t afford your monthly car payments, you should not enter into a reaffirmation agreement.
If you’re considering a Chapter 7 bankruptcy to eliminate your unsecured debt, it may be best to speak with a bankruptcy attorney who can help you make an informed decision about whether you’ll be able to keep your vehicle and whether it will be protected if you elect to file bankruptcy. Many law firms provide free consultations, which can help you figure out what’s right for you.
