Bankruptcy brings several different questions to the table, with one of the many making one wonder what they can keep before/during/after the process happens. Thankfully, we can add some insights as to what may happen to one of your more valuable assets: your vehicle.
Bankruptcy & Your Vehicle
Now whether or not you can retain your vehicle in bankruptcy depends on your answers to the following questions:
- Is your equity in the vehicle exempt?
- Are you behind in the payments to your vehicle?
- Is the bankruptcy you're filing Chapter 13 or Chapter 7?
Can I Retain My Vehicle In Chapter 7 Bankruptcy
In the event you have filed Chapter 7 bankruptcy, it means much of your debts have been cancelled or discharged. In return of this, nonexempt property must be given up. It's the bankruptcy trustee who sells the property, then uses such proceeds to pay the unsecured creditors in your bankruptcy claim. So in regards to your vehicle, your ownership of it depends on whether or not you are behind in payments or if your equity is exempt.
Is The Vehicle Equity Exempt?
Every state allows bankruptcy filers to retain certain types of property to a certain dollar amount. Thankfully, almost every state allow some form of motor vehicle exemption. However, the amount of exemption varies significantly. Such amounts can vary from $500 to thousands, which can be much more if the driver has had the vehicle outfitted for someone who is disabled.
In the event the equity in the vehicle (the market value of the vehicle minus the loan) is considerably more than what the state allows for vehicle exemption pricing, it's possible that the trustee can sell the vehicle, give you the exempt portion, and utilize the remainder of the proceeds to pay any unsecured creditors.
In this scenario, it's possible to utilize another exemption (which may entail a wildcard exemption) in order to cover the difference, which would entail having the trustee to accept other nonexempt property in order to keep the vehicle or pay your trustee (for the amount of nonexempt equity) of the vehicle in question.
Protecting Vehicle Equity Under Chapter 7
In the event one files for bankruptcy, it is possible to protect property that's necessary for living and working by "exempting" such property from the case. Every state decides property residents are capable of keeping and whether or not residents of the state can utilize:
- Federal exemptions
- State exemptions
- Which of the two (if available) work for you
If all of the equity can be exempt in the vehicle, it's likely one will be able to keep it. If anything, it's likely you'll be able to keep it in the event there's a tiny amount of nonexempt equity since the vehicle will not be worth selling. In such a scenario, the trustee will be forced to "abandon" it.
In the event substantial nonexempt equity is an issue, the trustee may:
- Distribute any remaining funds to creditors and claim a percentage fee for the sale of the vehicle.
- Reimburse sales fees and costs.
- Pay the exemption amount to you.
- Sell the vehicle.
In certain circumstances, the trustee will allow you to pay them (the trustee) for the nonexempt equity so that the vehicle can remain in your possession. In this scenario, it's likely that the price you'll have to pay is going to be discounted by the certain amount that the trustee will save in their sale cost. This means that you'll have to utilize funds that are not part of the bankruptcy in question. To do this, many individuals get a loan or a gift (from a relative or friend) or utilize post-filing earnings.
Are The Vehicle Payments Behind?
If you've happened to fall behind on vehicle payments, you will ultimately lose the vehicle in question under Chapter 7 bankruptcy (even if the equity has been exempt). However, if you can cover the arrearage or having the lender agree to a payment plan, it is possible to retain the vehicle. Other options include:
- Redeeming such property - Under Chapter 7 bankruptcy, one can essentially "redeem" a vehicle by paying the lender for the current replacement value of the vehicle in question. However, one can only do this in the event the trustee has "abandoned" the property in question (they did not sell it or it the vehicle has been exempt. However, this method of retaining a vehicle requires a lump sum for a payment, it isn't usually feasible for anyone considering bankruptcy.
- Reaffirming Debt - In the event the lender (and you) can make a new payment, you'll be able to keep the vehicle. It's possible to alter the terms of the original agreement, but lender must agree to the alterations. However, if you default on this loan, you will most likely be liable for the balance of the deficiency.
Retaining A Vehicle in Chapter 13 Bankruptcy
If the vehicle in question has significant equity or if one is behind in vehicle payments, it's usually easier to retain the vehicle in Chapter 13 than it is in Chapter 7.
Under Chapter 13 bankruptcy, one can keep their property, yet pay back some of their debts in full and/or others in portions through a five or three year payment plan. If you wish to retain your vehicle in Chapter 13 bankruptcy, you must take every precaution to keep your car payments current. If you happen to fall behind on such payments when filed, it's possible to pay off the rearrange through the Chapter 13 payment plan.
In addition to this, Chapter 13 bankruptcy also provides means for reducing vehicle loans given certain circumstances (such as if the vehicle is worth less than the loan amount in question).
Considering the information above, there's a lot to take in when it comes to bankruptcy and your vehicle. Tackling it yourself is more trouble than it is worth, which is why you need seasoned professionals in your corner. Thankfully, we're more than qualified to make sure you can retain your valuables in the event of bankruptcy.
Contact us today for further information!
Sources
https://www.fcwlegal.com/bankruptcy/personal-bankruptcy-cincinnati/
