Will I lose my car if I file for bankruptcy?
This is probably one of the most common question and concerns I address for clients contemplating bankruptcy. (I’ll also add Harley’s but that should go into its own separate category.) So, what happens to a car in bankruptcy? The answer to this seemly simple question is “it depends.” (I know. We lawyers give this answer a lot.)
Is there equity?
The first thing we need to look at is if there is any equity in the car. Obviously, if the car is owned outright, without any loans, it has equity. In this situation, whether you can keep the vehicle or not depends on what other assets you have.
Let’s assume your vehicle is worth $10,000. Assuming you don’t have a home with equity, we are going to use the 703 exemption. First, we use the vehicle exemption to protect the first $3,300. Then the remaining $6,700 would have to come from the “wild card.”
What if you have too much value in other assets to be able to protect your vehicle? In this situation, we would file a Chapter 13 to protect the vehicle. The other alternatives are to work out some sort of a buy back deal with the Chapter 7 trustee or allow the trustee to sell the vehicle and give you cash for the amount you were able to exempt.
The next situation is where you have a vehicle but there is a loan securing the vehicle. In this situation, we also look to see if there is equity. For example, if your vehicle is worth $13,000 but there is a car loan against it for $10,000, you have $3,000 in equity.
Just like in the example above, we need to use an exemption to protect the $3,000 in equity. Oftentimes, the loan balance is greater than the vehicle value, so there is no equity to protect.
In such situations, the next thing we look at is if you are current on your loan payment. Frequently, you can keep your vehicle after Chapter 7 bankruptcy by staying current your loan – before, during and after bankruptcy.
Protecting your car through Chapter 13
Chapter 13 has additional tools which allows you to keep your vehicle. If you have too much equity in the car, you can repay the unexempt value over a 3-5 years and keep the car. For example, if we can protect everything but $3,000 in equity, that would be approximately $50/month ($3,000/60 months*)
*This is an oversimplified calculations. There are other factors that go into the calculation such as liquidation value and trustee commission.
Additional benefits in Chapter 13
In Chapter 13, there are three additional benefits that doesn’t exist in bankruptcy.
1. Reduction in interest rate. If you have a high interest loan, we can reduce it down to about 5%. Obviously, this can lead to significant savings.
2. Lengthen the repayment term. Chapter 13 allows you to stretch the repayment term to 60 months, hence reducing the monthly repayment amount.
3. Cram down. If you have a vehicle that is worth less than the loan balance, we may be able to “cram down” the loan, provided the loan is more than 910 days old.
Other C’s from Bankruptcy Attorneys
Image credit: Leo Reynolds