Chapter 7 Bankruptcy - Motor Vehicle Exemption

  • Bankruptcy Chapter 7

Chapter 7 Bankruptcy: Can You Keep Your Car under Motor Vehicle Exemption?

Unlike popular belief, you do not lose all your possessions when you file for bankruptcy under chapter 7. Thanks to exemption laws, you can protect property including an unassuming vehicle (car, truck, motorcycle or van). Thanks to your state’s motor vehicle exemption you can protect a certain amount of equity in a car. If you completely own your vehicle (i.e. have cleared all vehicle payment dues or are up-to-date on them) you can take measures to avoid the lenders repossessing your car. In case you lag on your car payments you will have to come up with a plan to bring your payments current before filing for bankruptcy, if you want to have a chance to keep your car.

What Can You Protect with Motor Vehicle Exemption?
Under bankruptcy exemptions, you can keep any property that your state deems fit is essential for you to maintain your house and for you to continue work. However, under chapter 7 bankruptcy, you have to give up your non-exempt property which is sold off by your bankruptcy trustee (court appointed official for taking care of your case) to repay the unsecured creditors. In order to know whether you can keep your car, it is important to know its fair market value i.e. the price you will fetch for your car with its current age & condition. This value can be checked on websites like National Auto Dealers Association and will be taken as proof of your vehicle’s worth by the trustee.

How Much Equity is in Your Car and Can You Protect it with Motor Vehicle Exemption?
Once you have an idea of your vehicle’s worth, it is important to know the equity in it. This can be calculated by keeping these facts in mind –
• If you have a car loan, the amount you would be left with if you sold the car and paid off the loan is the equity amount. The money that remains with you after selling your car and clearing the dues is your equity. In case if what you owe is same as your car’s worth, you have zero equity. If your car is worth less than what you owe, you have negative equity.
• If you don’t have a car loan, i.e. no payments on car loan are due, your equity in your car is worth the car’s value.
Once you know your equity in your car, you need to find out your state’s motor vehicle exemption and compare the 2 figures. In case the exemption covers all your equity, your car cannot be sold by the trustee. However, if you have unprotected equity, the trustee can sell the car, give you the exemption amount and distribute the remaining money amongst your creditors.
Alternately, suggest lawyers of the Sacramento law firm Recovery Law Group, the trustee could also abandon the vehicle in case money is not available for creditors even after selling it. After selling the vehicle, the trustee has to pay off the loan, provide you with the exemption amount, and include the cost of sale as well as his (trustee’s) commission. If little to nothing is left with all this proceedings, the trustee might abandon the idea and you may get to keep your vehicle. Many trustees allow you to pay for any non-exempt vehicle equity i.e. the trustee may allow you a few months’ time to pay amount due to creditors.

Wildcard Exemption to Protect Your Vehicle?
In case your state’s motor vehicle exemption doesn’t cover your entire vehicle equity you can protect your vehicle using the wildcard exemption (in case your state allows it). Wildcard exemption can protect a fixed amount of any property of your choice. Some states also allow you to apply any unused portion of homestead exemption to other assets. You can add them to your motor vehicle exemption to protect your car’s equity.

Car Loans – An important Issue
In case you are through with your car loan, and your vehicle is exempted under the motor vehicle exemption, you are a happy person. However, if you have a car loan to manage and even if your bankruptcy trustee doesn’t sell off your car to pay your creditors, you have more work on your hand.

• In case you lag behind on your vehicle’s payments, the lender can take the car back even if the exemption protects your equity.
• You might be able to save your car by paying the market value of the car in one lump sum to the lender; or
• You can sign a new loan which will remain even after bankruptcy is over and make payments as per the new agreement.
It is important to note that while you can enter a reaffirmation agreement if you are up-to-date with your payments, it is not necessary for the lender to modify the loan in any way. So, if you are lagging on your car loan payments when you file for chapter 7 bankruptcy, you will be able to keep your car only if your lender is cooperating with you on this issue.