By: Jeena Cho
Recently, I received a call from a local TV station asking me if a person can keep a car if he or she declares bankruptcy. I get asked similar questions all the time and I cringe slightly because this seemingly simple question doesn’t have a simple answer. The person from the TV station said they are just looking for a simple, short answer for their viewer call-in segment. So, I gave the shortest answer I could, which was “generally, yes, but please consult with a lawyer.”
Since this is our blog and I’m not restricted to a 10 second sound bite, I’ll give a longer answer to this not necessarily simple question.
When you declare bankruptcy, you are entitled to keep a certain amount of property under the exemption laws of your state. Luckily, California has one of the most generous exemptions of any state, so in the majority of cases you can keep all of your property. Of course, the problem is that you don’t want to be the small percentage of people that has more than what the exemption law allows and risk the trustee taking your property.
In California, there are two sets of exemption laws for protecting and keeping your property. For purposes of this discussion, we’ll use one set of exemptions. Under this set of exemptions, there is a vehicle exemption of $3,525. I often have clients tell me s/he heard from someone (not a good source of information) that everyone gets to keep one car. Not true. The law says you can have a vehicle with equity up to $3,525. So, for example, if you have a Honda Civic worth $15,000 but there is a loan against it for $12,000, you can keep the vehicle since it only has $3,000 in equity.
So, what happens if you have more than $3,525 in equity? We then look to the “wildcard” exemption. Wildcard allows you to protect property up to $23,250 that would otherwise be unprotected. Generally, it’s used to protect cash, money in bank account, and other property that doesn’t have other specific exemptions.
This is where it gets tricky because let’s assume you have the Honda Civic but you own it outright. That would mean we would have to dip into the Wildcard exemption and use $11,475 towards the car ($15,000 - $3,525 = $11,475), leaving you only $11,775 to protect your other assets.
And there are other considerations such as what Chapter of bankruptcy you file. If you file Chapter 7 bankruptcy and are behind on payments at the time of filing, you risk losing the car. On the other hand, in Chapter 13, if you are behind on payments, you may be able to save the car.
Another consideration is the lender on your car, particularly in Chapter 7. Some lender have particular rules called “reaffirmation” for keeping cars.
As you can see, this seemingly innocuous question doesn’t have a simple answer. And getting the wrong answer may mean losing assets in bankruptcy. Google or your friends are not substitutes for good legal advice.
