Chapter 7 bankruptcy allows you to keep important property, including a vehicle. However, if the vehicle is an expensive model, has a lot of equity in it, or you cannot afford to make the payments, you might end up losing it. While filing for bankruptcy, you are allowed to protect some amount of personal property, including equity in the vehicle, home, household appliances, etc., using various exemptions provided by the state or federal government. The motor vehicle exemption is specifically meant to protect cars in Chapter 7 bankruptcy.
What happens if the equity in the vehicle is more than exempted amount?
If the equity in the vehicle is more than the motor vehicle exemption allowed in your state, you can cover the equity using a wild card exemption. Some states even allow you to use both exemptions to protect your equity in the vehicle. The bankruptcy trustee cannot sell the vehicle if all equity is exempted. Suppose most of the equity in the vehicle is exempted. In that case, the trustee abandons the vehicle as selling it will not generate enough money to pay the creditors. However, if substantial non-exempt equity exists in the vehicle, the trustee can sell the vehicle and pay you the exemption amount. After deducting the sale cost and fees and subtracting the trustee’s fee, the remaining amount is distributed among the creditors.
If you had purchased the vehicle using a loan, you need to stay current on the payments when you file for Chapter 7 bankruptcy. This is because the vehicle is a secured debt, and the lender can repossess it using the lien rights. Since Chapter 7 does not allow you to catch up on missed payments, you need to be current on your car loan if you wish to keep the vehicle. The lender can either ask the court to lift the automatic stay or wait till your Chapter 7 bankruptcy ends to repossess the vehicle. You can either work out a solution with the lender or file for chapter 13 bankruptcy if you need to keep the car and are behind on the payments.
Options available to people with a car loan in chapter 7 bankruptcy
Chapter 7 bankruptcy filers with a car loan can keep the financed car by redeeming the vehicle. In this case, they pay the car lender an amount equivalent to the vehicle’s current market value in a single lump-sum payment. The court decides the vehicle’s value if the creditor and the borrower cannot agree on it. This option usually works well if the car’s value is less than what you currently owe. Another option that you have is to surrender the vehicle back to the lender. This wipes out the car loan debt entirely.
Some car lenders allow you to keep the car if you reaffirm the debt. In this case, you continue to make payments after your bankruptcy if you wish to keep the vehicle. Unfortunately, your credit report does not mention the payments you make on reaffirming the car loan. Moreover, since there is no formal contract in place, the creditor can take back the vehicle anytime. Reaffirming the debt also makes you liable for it even after your bankruptcy discharge. To reaffirm, you need to show that you can afford the payments; otherwise, the court will disapprove the agreement, and the creditor will repossess the vehicle.