Bankruptcy and Your Vehicle
The bill collectors are calling you and everyone you know, your wages are about to be garnished and you can barely pay the necessities. You know you need to file bankruptcy. So what is stopping you, the fear of losing your car, truck, or motorcycle?
In most cases when you file bankruptcy you can keep your vehicle. Of course, it is a little more complicated than just file bankruptcy don’t worry about your car. This article will explore several scenarios I have dealt with in the past dealing with bankruptcies and client’s vehicles. Motorcycles come with a caveat, here it is… Motorcycles are slightly different from other vehicles in that they can been classified as non necessity luxury items so contact your attorney to see what your specific options are regarding motorcycles.
Scenarios in a Chapter 7 Fresh Start Bankruptcy.
Scenario 1. You owe nothing on the car and it is not worth that much. You do not make enough money to cover even your basic needs, you have a car and you do not want to lose it. Chances are if you have a car in this situation you own it outright. Whether you can keep it or not will depend on the value of the car. In Washington, for example, the automobile exemption for an individual is $3450.00. Washington also allows a wildcard exemption of $3000.00. If your car is worth $4500.00 in its current condition, an individual could use the full motor vehicle exemption and then use $1050 of the wildcard. That will fully protect your car and still save $1950.00 of your wildcard. Your car is safe.
Scenario 2. You owe nothing on the car but it is worth more than the exemption value. This is the most complicated scenario in a chapter 7 bankruptcy and may be better dealt with in a chapter 13. Nevertheless, there are options in a chapter 7. Let’s say the car is worth $10,000.00. As discussed above, you can use the current vehicle exemption of $3450.00. You can then add to that the wild card exemption of $3000.00. That protects $6450.00 of value in the vehicle. meaning that you have $3550.00 unprotected. Now we have a couple of options.
1) Let the trustee take and sell the vehicle and use the proceeds to pay off some of your creditors. If you do this, the trustee will cut you a check for $6450.00 and use the $3450 that is unprotected to pay some of your creditors. You could then use this money to help get a new car or to buy a used car outright.
2) Try to work out a deal with the trustee to repay the unexempt equity. Trustees are usually willing to work out a reasonable payment plan to allow you to keep something like a vehicle. Common terms might be to pay back the equity in six equal installments, or to make a down payment with a monthly payment that ends in a larger payment when you get your tax refund. You need to be careful with this useful arraignment, if you default on your payments your discharge could be denied or revoked.
3) Try to get a new loan on the car after the bankruptcy is finished which would allow you to pay the equity to the trustee. You would then have a car payment to pay the newly incurred loan.
Scenario 3. You owe less on the car than what the car is worth. If you are looking to file a chapter 7 to obtain a fresh start and avoid making a chapter 13 trustee payment, you should be able to protect that car. Say the car is valued at $15000.00 and you still owe $12000.00. In this case you have $3000.00 in equity. Because the automobile exemption is worth more than the equity you have in the vehicle, your car will be protected. You will need to speak with your attorney about what to do during and after the case, but you will need to maintain your loan payment if you wish to keep the vehicle.
Scenario 4. You owe more on the car than it is worth. In this scenario you might owe, for example, $15000.00 on a car that is only worth $7000.00. You have several options under this scenario.
1) decide to let go of the car. Why pay more than double the value of anything? You could surrender the vehicle and then look to purchase a vehicle with better terms after the discharge;
2) You could continue to pay on the vehicle at the terms provided in the loan agreement;
3) We could seek a redemption loan whereby you get a new loan that is only up to the value of the car in its current condition. In this case you need to qualify for the new loan and there may be additional attorney’s fees but it could potentially save you a lot of money and keep you in a car that you love.
Scenario 5. Bonus Scenario! You have unexempt equity in your vehicle but you also have tax liens which attach to personal property. This one is a little tricky, but if you have no other equity in any other property and the amount of the tax lien is greater than the unexempt equity in your vehicle, the trustee is not likely to bother with you or your vehicle. The down side to this is that if they were to take and sell the car for the unexempt equity, they would then use that money to pay off or to pay down your tax lien. If the trustee leaves you and your vehicle alone, you are still going to have to find a way to deal with those taxes once your bankruptcy is done.
Scenarios in a Chapter 13 repayment plan bankruptcy:
Scenario 1. You owe nothing on your car and it is worth less than the exemptible amounts. Under this scenario, your vehicle would have no impact on your chapter 13 plan payment.
Scenario 2. You owe nothing on your car but it is worth more than the exemptible amounts. Under this scenario, we have to offer the unexempt value to the creditors in the form of your trustee payment. While this goes beyond the scope of this article, we can pay the unexempt value by way of the trustee payment over a period of time lasting as long as 60 months. This is a valuable tool if you have a car that is worth a lot of money and you cannot bear to part with it.
Scenario 3. You owe money on the car and you want to keep it. This scenario gets complicated depending on whether the loan on your car was taken out at the time that you bought the car. It also matters as to how long ago you bought the car. If you bought the car more than 910 days ago, we can cram down what you pay on the car based on its current value. So say that you owe $15000.00 on the car but it is only worth $7000.00, we can propose a plan that only pays that creditor back $7000.00 as a secured claim. We can also lower the interest payment on the car depending on the rate that the loan is for and depending on the jurisdiction. If you bought the car less than 910 days ago, we may still be able to lower the interest rate that you pay on the car, but the full dollar amount of the outstanding loan would have to be paid back as a secured creditor.
Scenario 4. You owe money on the car and you just do not want it any more. In this scenario a chapter 13 can also be a good option depending on what the rest of your financial situation looks like. We can propose a plan that surrenders the collateral. The lien holder will come and get the car. They then have to sell it and credit your account for the amount of the sale. In the chapter 13 they are then able to file an unsecured claim for the remaining balance. The benefit to you though is that you will end up paying less than you owed (possibly zero) and paying no further interest on the loan.
Conclusion: As you can see, there is no simple answer to what happens to a car in a bankruptcy. The good news though is that there are many options that allow you to keep your vehicle and still other options that will allow you to escape from a bad deal. If you find yourself in financial difficulty and the thought of losing your only car is stopping you from filing, call your local bankruptcy attorney to discuss which option might be best for you