Can I keep my car if I file bankruptcy?
Whether or not you are allowed to keep your vehicle during a bankruptcy is a big question for many individuals who find themselves faced with a slough of tough questions. The short answer is “Yes” – in almost every situation it is possible to keep possession of one or more of the vehicles you are currently driving.
However, making this possibility a reality is slightly more involved. In this article, I’ll seek to help you better understand the methods that are available for keeping possession of your vehicle(s) during a bankruptcy. In addition, I hope to help you determine if keeping your vehicle is a wise decision or not. The first question then is “How can I keep one, two or more of my vehicles during Bankruptcy?”. In order to answer that question, you need to figure out 2 basic pieces of information.
What is the Current Equity of my Vehicle? ~
If you own your vehicle out right, the equity of your vehicle is simply its current market value. Researching your make and model on websites like Edmunds, or Kelley Blue Book will allow you to quickly come up with an accurate value for your car. If you are making payments toward ownership of your vehicle, you will need to subtract what you owe on your vehicle from the value of the vehicle to determine your car’s equity.
Am I Current on my Car Payments?
The second question is whether you have been keeping up on your monthly car payments. If you have complete ownership of your vehicle and are making no payments, this question is a moot point. Find out if your lender has access to your vehicle as collateral. Your payment status will come into play when determining how to keep your vehicle during bankruptcy proceedings.
Once you’ve answered these questions we can begin to apply the answers to your specific situation. Let’s first take a look at your car during a Chapter 7 Bankruptcy.
Chapter 7 Bankruptcy
The goal of filing for Chapter 7 Bankruptcy is essentially to surrender your non-exempt property to a trustee who sells it and uses the proceeds to payoff as much of secured debt as possible. In exchange, your applicable unsecured debts are discharged or forgiven. (Secured debt refers to debt linked to a physical asset such as a house mortgage or car loan, while unsecured refers to debt that is not directly linked to any assets such as credit card debt or medical bills.)
Hopefully, going through this process allows you to make a fresh financial start while only paying a percentage of your total debt obligations. As you begin to work your way through a Chapter 7 Bankruptcy, here are 3 different options for hanging on to your vehicle.
1. Use an Exemption to Cover Your Car’s Equity
In every Chapter 7 repayment plan, you are allowed certain exemptions. Once you have used up your exemptions, then all of your other assets are available to be sold to help repay your secured debts. You can choose to enter your car’s equity into one of your exemption categories. If all of your car’s equity can be covered by exemptions, you’ll be able to keep the car from being sold by the trustee.
2. Reaffirm the Loan
Reaffirmation involves recommitting to the same car loan and making sure it is approved by the bankruptcy court. If your creditor agrees, then you’ll be able to maintain possession of your vehicle as long as you stay current with your payments. Be aware that by reaffirming a car loan, you are committing to repay the entire balance with interest as well as any late fees/ late payments that may have accrued. You will also be liable for the entire amount due if you default on the loan again.
3. Move to Redeem the Vehicle
If you can pool the necessary cash, moving to redeem is another way to keep possession of your vehicle in spite of bankruptcy. Redeeming your vehicle is the process of paying the lender for the value of the car instead of what you currently owe on the car. If you owe more on your car than it’s current market value, redeeming your vehicle might be a good option for you. You must be able to cover the equity of the car in your exemptions in order to qualify for a redemption.
# Warning #
If you are behind on your car payments and the lender has a lien on your vehicle, you are in danger of your car being repossessed as collateral. Make sure you speak with a Bankruptcy Attorney to find out how you can protect your car from repossession during the bankruptcy process.
Letting go of the Car
If you decide to skip the hassle of trying to keep your car during a Chapter 7 Bankruptcy, you will want to go through the process of surrendering your vehicle. You will want to make sure that you are no longer liable for any late fees, interest fees or outstanding balances on your vehicle. Also, if someone cosigned on your vehicle loan, they may be liable for part of the debt even after you have surrendered the vehicle.
If you choose to surrender your vehicle(s) during a Chapter 7 Bankruptcy, you will most likely need to purchase a used vehicle to commute, buy groceries, etc. Opting out of your car payments by surrendering your old vehicle may free you up to purchase a less-expensive used car without having to make car payments.
Now that you know your options for keeping your vehicle during a Chapter 7 Bankruptcy, let’s take a look at your vehicle’s status during a Chapter 13 Bankruptcy.
Chapter 13 Bankruptcy
When you file for chapter 13 Bankruptcy, you will start a 3-5 year process of paying a specific percentage of your unsecured debt and all of your non-exempt secured debt. This will include the total owed amount of all your secured debt (house mortgage, vehicles, furniture etc.) minus the amount you are allowed to exempt in your payment plan. You’ll also likely pay a small percentage of all your unsecured debts depending on your income level.
The more non-exempt secured equity you possess, the higher your monthly payment will be. It’s important to know how big of a payment you will be able to afford before you get too attached to a vehicle. Here are 2 ways you can keep your vehicle during a Chapter 13 Bankruptcy.
1. Use an Exemption to Cover your Car’s Equity
During a chapter 13 Bankruptcy, you are given a certain amount of exemptions for your secured debts. If you have enough exemptions to cover the equity of your vehicle, then you will be able to keep the car from being repossessed. You will also have the entire 3-5 year payment period to finish paying off your obligations.
2. Receive a Car Loan Cram down
If you meet certain requirements, you can be approved for a car loan cramdown. This is a stipulation that allows you to pay for the current value of your vehicle if it is less than the amount you owe on the vehicle. Once approved for a cramdown, you will have the duration of your repayment plan to fully pay off the car’s value.
The remainder of your car loan would be classified as “unsecured debt” and you would only be required to pay a small percentage of the balance throughout your payment plan. When you finish the bankruptcy proceedings, you will have full ownership of the vehicle.
~ What if my car is a Luxury Vehicle? ~
In some states ( such as California ) any and all secured debt payments are “allowable withholdings” and are therefore able to be retained during a chapter 13 bankruptcy. In other states, the decision is left up to the bankruptcy court. If you are making payments on a luxury car and are wanting to hang on to it, you will need to prove to the court that :
- Your luxury/sports vehicle is a necessary expenditure
- You are able to make timely car payments while keeping up with the chapter 13 payment plan.
If the court approves your plan, you’ll be able to keep and payoff your vehicle during the 3-5 year payment plan, even if it’s a luxury car.
Surrendering the Car
If you decide you don’t need to keep your current vehicle, you also have the option of surrendering a vehicle during a Chapter 13 Bankruptcy. This might make the most sense if you don’t have the extra income to cover an expensive car payment in addition to the rest of your Chapter 13 payment plan.
Now that you’re familiar with your options, here are some final recommendations on how to keep your car during a bankruptcy. In almost every circumstance, there is the ability for you to keep your vehicle, whether you are going through a chapter 7 or chapter 13 bankruptcy. You can usually keep your car if you are willing to work hard enough.
The real question is this: Is keeping my vehicle during bankruptcy in my best interest? Figure out what is most important to you and then make some tough decisions. Remember, there will always be a shiny new car begging to be bought.