Not necessarily at all. If you want to and can afford to keep your car, an experienced bankruptcy attorney can help you apply bankruptcy exemptions to keep your car out of reach of the Chapter 7 Trustee.
You should also know that Chapter 13 allows you to “cram down” a car loan or pay a lease-end balloon payment over your three or five-year plan. If your car is simply unaffordable, you also have the option of surrendering your car in bankruptcy and having the underlying debt discharged with no need to repay the car loan.
This article will explain your options for keeping your car, surrendering your car, and making your car more affordable using bankruptcy, from the desk of noted bankruptcy lawyer David M. Offen, Esq.
And if you have questions about how your car loan or car lease will be treated in bankruptcy, give us a call. Your initial consultation is free of charge.
What Happens to Your Property When You File Bankruptcy
The moment you file a bankruptcy petition all your assets become part of the “bankruptcy estate” and can be seized by a Trustee and sold for the benefit of your creditors. Thankfully, the federal Bankruptcy Code includes many bankruptcy exemptions that take property or your equity in property out of the estate and out of reach of the Trustee.
Most debtors filing for bankruptcy relief keep all of the assets they want to keep by applying federal or state exemptions. It is only in the case of luxury goods or fully-owned real property that exemptions may not be enough to cover the value.
Find Out How to Protect Your Car with Bankruptcy Exemptions
Motor Vehicle Exemption
In Pennsylvania, we almost always use the federal exemption scheme rather than the state exemption scheme, especially when you have equity in a motor vehicle. The current federal exemption for equity in a motor vehicle as of this writing (November 17, 2021) is $4,000.
If the equity in your car is more than $4,000, don’t worry – there are more applicable exemptions that may apply.
Wild Card Exemption
The federal “wild card” exemption can be used on anything, and if you need to use it to exempt equity in your car, you can exempt an additional $1,325, bringing the total to $5,325.
Unused Homestead Exemption
The federal homestead exemption is currently $25,150. If you have less equity in your home than that, you can use the remainder to exempt equity in your car up to $12,575.
For example, if you have $20,000 equity in your home, you can apply another $5,150 to the equity in your car, for a total of $10,475 in equity protected. If you do not own a home, however, you can only use $12,575 of the homestead exemption for your car, bringing the total equity in a motor vehicle that is exempt to $17,900.
Update: The amount of these exemptions was set to change on April 1, 2022.
Calculate Your Car’s Worth
How do you know how much equity you have in your car? You or your lawyer needs to figure out how much your car is worth and then subtract the amount of your car loan from that to get the amount of equity you have.
Bankruptcy trustees and car lenders generally accept a Kelley Blue Book or NADA retail value as of the month of your bankruptcy filing as proof of current value. Be sure to account for the car’s condition and mileage, but do not attempt to underreport value or use a lesser number if the car is really worth more – you risk an objection by the trustee or the car lender.
Maintaining Your Vehicle’s Equity
To maintain your vehicle’s equity, you should perform the regular recommended maintenance and also maintain insurance.
Determining What Happens to Your Car During Bankruptcy
Dealing with Your Car in Chapter 7 Bankruptcy
If you want to keep your car, you must apply the Chapter 7 property exemptions to exempt the equity in your car and protect it from being taken by the Chapter 7 Trustee.
If you cannot afford to keep your car, or the car is damaged or you do not wish to keep the car, then you can legally “surrender” the car to the car lender in your Chapter 7 filing. You will either take the car to your dealership, or the car lender will repossess it.
You must maintain insurance on the car until it is no longer in your possession. If it suffers any damage between the date of your filing and the date you actually surrender possession and it is not insured, you may have to pay the amount of the damage. When you get your Chapter 7 discharged, you will also be discharged of the unpaid portion of your car loan. You may also surrender a leased car in the same way.
Keep in mind that there is an income limit to file Chapter 7 bankruptcy.
Dealing with Your Car in Chapter 13 Bankruptcy
If you want to keep your car and you have sufficient exemptions to cover the equity, you need do nothing.
If you want to keep your car and do not have sufficient exemptions to cover the equity, you will have to pay the difference to your creditors through your three- or five-year Chapter 13 plan.
If you want to keep your car but are behind on payments, you can catch up with your car loan or car lease payments through your Chapter 13 plan, as long as you can afford to make the regular monthly car payments outside the plan.
If your car is worth less than the balance of your car loan, you can “cram down” your car to the retail value as of the date of your bankruptcy filing, and pay it off through your Chapter 13 plan at prime plus 1-3% interest.
If you are at the end of a car lease and want to purchase the car, you can pay off the lease-end balloon payment over three or five years through your Chapter 13 plan.
Contact an Experienced Bankruptcy Lawyer for Help with Your Car
Bankruptcy can be a powerful tool to help you deal with your auto loan or lease, discharge the underlying debt, or make your car much more affordable. Contact an experienced bankruptcy attorney to discuss your car situation and goals, and find out how bankruptcy can help you reach those goals.
