The fear of losing their car is a common reason people give for not exploring bankruptcy options. Unfortunately, car equity and bankruptcy can be confusing. The confusion can increase the stress you might feel as you consider filing for bankruptcy relief. However, if you know just four things about car equity and bankruptcy, you can cut through the legal complexities.
Car Equity and Bankruptcy: What Do You Need to Know?
If you want to file bankruptcy, but you are nervous about losing your car if you file bankruptcy, consider these four things about car equity and bankruptcy:
How Does Your Vehicle’s Equity Work in a Chapter 7 Bankruptcy?
Your property becomes part of the “bankruptcy estate when you file for bankruptcy relief.” In a Chapter 7 bankruptcy, the Chapter 7 trustee may use non-exempt assets of the bankruptcy estate to pay unsecured creditors.
Unsecured creditors have debts that are not secured by collateral. Examples of unsecured debts include:
- Medical bills
- Credit card debts
- Personal loans
- Judgments (not secured by a lien on real estate)
- Student loan debts
- Tax debts and other money owed to the government
- Past due child support and alimony payments
- Old rent and lease payments
The Chapter 7 trustee sells assets and uses the proceeds to pay the unsecured debts. First, however, the trustee must consider how much equity is available in each asset because the Chapter 7 trustee only receives the “net equity” after all liens, costs of sale, and bankruptcy exemptions are paid.
Let’s look at how the process works by using an example. For our example, let’s assume you believe your car is worth $20,000.
How Does a Chapter 7 Trustee Estimate My Vehicle’s Value?
What you believe your car is worth and the figure the Chapter 7 trustee uses might differ. Factors the Chapter 7 trustee uses to estimate a vehicle’s value include:
- The vehicle’s make and model
- The age of the vehicle
- The vehicle’s condition
- The number of miles on the vehicle’s odometer
- Whether the vehicle has a crash history
An important consideration is the discount for a “quick sale” or auction. If a vehicle is sold by auction, it generally sells for a price lower than the owner might receive if they advertised the car for private sale. Each trustee determines how much they discount an asset for a quick sale or auction, but it may be as much as ten percent in some cases.
Based on all of the above factors, the trustee decides your vehicle is worth $17,000 at an auction. However, the Chapter 7 trustee must take a few more steps to decide whether he wants to sell your car.
Remember, the Chapter 7 trustee receives the net equity for your car. Therefore, he must subtract the costs of the sale from the value to calculate the net equity. Therefore, net equity would equal:
Fair Market Value (quick sale value)
Payoff of liens against the title
Costs of sale (i.e., towing charges, storage fees, auction fees, title transfer, etc.)
Chapter 7 trustee’s commission
The result is the amount of money available to pay toward your unsecured debts.
NOTE: Chapter 7 trustees use a different process for valuing antique vehicles, commercial vehicles, and vehicles with other qualities that increase their value substantially. In these cases, the trustee would likely employ an appraiser or auctioneer to determine the vehicle’s value.
How Does an Auto Exemption Work in Bankruptcy?
The bankruptcy automobile exemption generally throws a “wrench” into the Chapter 7 trustee’s desire to sell a vehicle. A bankruptcy vehicle exemption protects a specific amount of equity in the vehicle from being used to pay unsecured debts. If the trustee sells your car, he must pay you the amount of your claimed vehicle exemption.
After paying the exemption, there may be very little money to pay toward the unsecured debts. Furthermore, a Chapter 7 trustee’s commission is based on what he disburses to the unsecured creditors. Therefore, the Chapter 7 trustee wants to ensure there will be sufficient money remaining after paying debts and exemptions to disburse to unsecured creditors.
Bankruptcy exemptions vary by state. Some states allow debtors to choose between federal bankruptcy exemptions and state bankruptcy exemptions. Other states require debtors to use the state bankruptcy exemptions.
Before filing Chapter 7, verify your state’s bankruptcy exemptions. You may explore bankruptcy exemptions using our free bankruptcy exemption calculator, talking to a bankruptcy lawyer during a free bankruptcy consultation, or researching bankruptcy exemptions in your state’s laws.
What Can I Do if My Vehicle’s Equity Is Above the Auto Exemption?
Many people who file bankruptcy keep their vehicles. There is little to no non-exempt equity in the vehicle. Therefore, the bankruptcy trustee is not interested in taking the car because the value is “inconsequential” to the bankruptcy estate. That means the money creditors would receive if the trustee sold the asset does not justify the time and expense of administering the asset.
However, if your vehicle has equity above the exemptions, you may keep your car in some cases.
Car Equity – Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
As discussed above, the Chapter 7 trustee uses non-exempt equity to pay unsecured creditors. The trustee sells your car, pays you your claimed exemption, and disburses the remaining money to claims.
However, Chapter 13 trustees do not seize and sell assets. Therefore, if you have unexempt equity in your vehicle, it may slightly increase your Chapter 13 payment plan. However, you can keep the car by paying a little more each month through your Chapter 13 plan.
Final Thoughts About Car Equity and Bankruptcy
Vehicle equity can be a challenging question in a bankruptcy case. Bankruptcy exemptions vary by state. Furthermore, local Chapter 7 trustees have some discretion regarding administering an estate.
Therefore, if your vehicle has equity above the exemption for your state, it is best to speak with an experienced bankruptcy lawyer near you.
At Ascend, we want to help you find the best possible solution to your debt problems. We can help you locate a bankruptcy attorney who offers free bankruptcy consultations. We can also discuss non-bankruptcy methods for getting rid of debts.
Most of our services are free. Contact us online or by phone to discuss your situation. We help individuals struggling with debts find their way to a more secure financial future.