Several things could go wrong if you try to protect a vehicle in Chapter 7 by changing the name of the title. Instead, your best step is to talk with a bankruptcy lawyer about how to protect a vehicle in Chapter 7. Certain things you do before filing Chapter 7 could result in your case being dismissed, property being seized, and/or allegations of bankruptcy fraud.
What Happens if I Change the Name on My Car Title to Protect a Vehicle in Chapter 7?
Changing the name on your car title is considered a transfer, regardless of whether you receive any money for the transfer. Transferring an asset immediately before filing bankruptcy for less than fair market value is prohibited.
The Chapter 7 trustee could file a lawsuit against the person who now has title to the vehicle to seize the asset for the bankruptcy estate. If the bankruptcy trustee can prove that changing the name on the car title was fraudulent, the court could dismiss your bankruptcy case. It could also impose fines and prison time for bankruptcy fraud. A bankruptcy trustee can petition to void a fraudulent transfer within two years of filing bankruptcy or the amount allowed by state law, whichever time is longer.
Suppose you sell your vehicle before you file bankruptcy. If the sale is for an amount below the fair market value, the trustee might be able to void the sale. Also, suppose you used the funds from the sale of the car to repay friends or family members or make preferential payments to some creditors. In that case, the trustee could sue the recipient to recover that amount for the bankruptcy estate.
Instead of changing the name on your car title before filing bankruptcy, protect a vehicle in Chapter 7 by using bankruptcy exemptions.
Protecting a Vehicle in Chapter 7 with Bankruptcy Exemptions
First, this issue only becomes a problem if your vehicle has equity. Equity is the difference between your vehicle’s fair market value and the payoff of the car loan.
The Chapter 7 trustee searches for assets he can sell to pay your unsecured creditors. These creditors do not have a lien on assets. Examples of unsecured debts include:
- Medical bills
- Personal loans
- Income taxes
- Student loans
- Child support
- Foreclosure and repossession deficiencies
- Credit cards
- Old gym memberships, lease payments, and rental payments
If you have property with excess equity, the Chapter 7 trustee sells the assets and pays the unsecured creditors. However, the trustee abandons the property if an asset does not have excess equity.
Let’s assume that your vehicle’s fair market value is $15,000. However, the balance on your car loan is $20,000. Therefore, there is no equity for the trustee to use to pay your debts.
On the other hand, let’s assume your vehicle is worth $25,000 and the loan balance is $15,000. So you have $10,000 in equity in your car that could be used to repay your debts.
However, bankruptcy exemptions protect specific amounts of equity in property. The protected equity cannot be used to repay your debts. Therefore, if the $10,000 excess equity is covered by a bankruptcy exemption, the Chapter 7 trustee would not seize your car.
What Are Bankruptcy Exemptions?
The legislators included federal bankruptcy exemptions in the United States Bankruptcy Code. They understand that debtors needed to retain some assets to recover and rebuild after a financial crisis. The exemptions protect the equity in specific assets from creditors and the court.
Some states require that debtors use state bankruptcy exemptions instead of federal exemptions. If you are worried about how to protect a vehicle in Chapter 7, use our free bankruptcy exemptions calculator to estimate the risk of property in Chapter 7.
How Do Bankruptcy Exemptions Protect a Vehicle in Chapter 7?
The current federal bankruptcy exemption for a vehicle is $4,450. The government adjusts bankruptcy exemptions every three years. Married couples can double the exemption to $8,900. If your joint vehicle has less than $8,900 in equity, the Chapter 7 trustee should abandon the asset. However, the trustee could seize the asset if the vehicle’s equity is above the exemption.
Before a Chapter 7 trustee seizes a car in bankruptcy, he carefully analyzes the asset’s value for the bankruptcy estate. First, the Chapter 7 trustee estimates the fair market value for the vehicle at a quick sale, which could be less than the actual market value. The trustee deducts the lien payoff, costs of sale, and the trustee’s proceeds. Then, the trustee deducts the claimed exemption. If the number is positive, there is some value for the bankruptcy estate.
The value for the estate depends on the amount the trustee expects to receive from selling the vehicle. If the trustee calculates that the unsecured debtors will receive a very small payment, the trustee could abandon the vehicle for “inconsequential value.”
If the Chapter 7 trustee decides to sell your vehicle, he must pay you the claimed exemption. Therefore, if you claimed the federal bankruptcy exemption of $4,450, the trustee pays you that amount before distributing any money to your creditors.
What Happens to a Vehicle With Excess Equity in Chapter 13?
Vehicle equity is handled differently in Chapter 13. A Chapter 13 trustee does not seize and liquidate assets. Instead, equity above the exemption amount must be paid to the unsecured creditors.
For example, suppose that your vehicle has $8,000 in equity after deducting the balance of your car loan and the bankruptcy exemption from the fair market value. Your unsecured creditors must receive at least $134 per month ($8,000 divided by 60 months).
Suppose your Chapter 13 plan includes a payment to unsecured creditors of $200 per month. They would receive more than they would in a hypothetical Chapter 7 case. However, suppose you propose a plan payment that includes a lower amount than $134 for unsecured creditors. In that case, the court might require you to increase your payment slightly to cover the excess equity in your vehicle.
In addition to protecting your vehicle’s equity, a Chapter 13 also helps you protect your vehicle by including your car loan in the Chapter 13 plan. The creditor could not repossess the vehicle as long as you remain current on your Chapter 13 payments. In a Chapter 7 case, the creditor can repossess the vehicle for late payments after the bankruptcy case closes or if the court grants the creditor relief from the automatic stay.
Should I File Chapter 7 or Chapter 13 if I Have Excess Equity in My Car?
The first step is determining whether you qualify for Chapter 7 or Chapter 13.
You must meet income qualifications to file Chapter 7. It is intended for individuals with insufficient income to repay their unsecured debts. If your income exceeds the median income for your state or you have disposable income above a specific amount, you do not qualify for a bankruptcy discharge in Chapter 7.
On the other hand, Chapter 13 is a wage earner plan. Therefore, you must have sufficient income to fund the Chapter 13 plan. If not, you cannot protect your vehicle in Chapter 13.
You can use our free Chapter 7 calculator and free Chapter 13 calculator to compare bankruptcy options. Also, try our free debt settlement calculator to compare other debt-relief options. Debt payoff planning, debt settlement, or debt management might be a better option than bankruptcy.
Call Ascend for More Information
It is time for you to take control of your finances. At Ascend, we work with individuals and couples to develop a debt relief plan that works best for them. We can help you get rid of debts.
If you have debts you cannot pay, call or text us at (833) 272-3631 or contact us online for a free case evaluation.