Keeping Your Car in Bankruptcy

One of the most common fears of people considering a bankruptcy filing is that they will lose their car. For many of my clients, this is absolutely not an option, as they need their car to get to work, pick up their kids, and run errands.

Well, good news... as long as you can afford to keep it, you will NOT lose your car! The bankruptcy code recognizes the importance of cars in everyday life, and has accounted for it. You can absolutely file bankruptcy AND keep your car.

First, Federal bankruptcy exemption law provide an exemption of $3,675.00 for each bankruptcy filer (both husband and wife in a joint filing). This protects the value in your car(s) from creditors you owe money to. If property is exempt, they can't touch it. Now, there is a very good possibility your car is worth more than $3,675.00; however, the exemption need only be used towards the equity you have in the car. Equity is the value of the car MINUS what you owe. This amount is often less than the exemption amount, as cars lose value very quickly. In addition, there is an additional "wild card" exemption that normally covers any equity above the $3,675.00 limit.

Chapter 13 bankruptcy will even allow you to keep a car that you are behind payments on. You can catch up significant arrears through a 3-5 year Chapter 13 plan, and it is quite often used to help individuals who fell behind on a car payment due to temporary loss of job or other financial issue. The arrears are caught up over the course of the plan, with is normally quite affordable, while allowing continuing use of the car.

I did mention earlier that you can only keep a car you can "afford". There are some limitations on keeping your car in bankruptcy. The greatest limitation involves Chapter 7 and delinquent car payments. You can NOT keep a car you are behind payments on in a Chapter 7 bankruptcy. I will often advise clients who qualify for a Chapter 7 bankruptcy, yet owe back payments on a car, to catch up with the payment before filing the Chapter 7. If this is not possible, we will consider filing a Chapter 13 bankruptcy reorganization. Either way, I always tell my clients I am not in the business of having them lose their car... if there is a way to keep your car (no matter how desperate your situation), I will figure it out.

All this being said, through the exemption rules and general policy, bankruptcy law is designed for you to keep your car. People often erroneously believe they will lose their car, and refuse to consider a bankruptcy that could be hugely beneficial. Don't let this misplaced belief limit your financial options.

Contact us if you are having issue with a car payment or wish to discuss your financial issues in a free consultation.

Can I Keep My Car In Bankruptcy?

Yes!

Now, that short, emphatic answer will need to be qualified in a bit, as you must be able to afford your car and continue making payments. But, as long as you can make the payments, you can keep a car in Chapter 7 and Chapter 13 bankruptcy.

The Bankruptcy Code is premised on the idea of giving debtors a "fresh start". This means giving bankruptcy filers the opportunity to go on with their lives and work as normal, and get back on their feet. Having a car is vital for many filers, so the Code protects their ability to keep their car. You need your car to go to work, pick up your kids from school, and run day-to-day errands. The law recognizes this, and makes it fairly easy to protect your vehicle.

The Federal bankruptcy exemptions allows debtors to protect $3,675 in equity for one car (two cars if the bankruptcy is a joint, marital filing). This $3,675 need only be applied to the amount of equity you possess, that is, the value of the car minus what is owed on it. Since cars depreciate so quickly, equity is normally quite small in a car. This is good news for bankruptcy purposes, as it allows most debtors to exempt their car.

A problem may arise if the debtor has multiple vehicles in their name. However, even this should not be an issue if the "wildcard" exemption is available to protect the second vehicle. The wildcard exemption can also be used if the automobile exemption is exhausted. An experienced bankruptcy attorney will be able to help you properly exemption plan.

The second issue in keeping your car is whether you can afford to continue making payments. When filing a Chapter 7 bankruptcy, you must be completely current on your payment at the time of filing if you wish to keep your car. Otherwise, the finance company can (and will) repossess the vehicle. If you are behind and want to file a Chapter 7 bankruptcy, it will normally be advisable to wait to file until after your payment is caught up. If you are behind on the payment and wish to abandon the car, Chapter 7 bankruptcy allows you to do so, while your obligation on the remaining payment will be dismissed. It is something to consider if your car payment is prohibitively high, or your car is a "lemon".

Chapter 13 bankruptcy allows you to not only keep your car if you are current on your payment, but also to catch up on arrears over the course of the bankruptcy plan. This is extremely important if your car payments are past-due and you are facing repossession. The Chapter 13 plan allows you to catch up over the course of the 3 to 5 year plan, and at its conclusion you will receive the title of the car. The Chapter 13 plan allows the arrears to be spread out over the full term of the plan, so even if you are multiple months behind, it is possible to catch up.

Misinformed debtors often believe they will lose their car in bankruptcy, but as long as it can be exempted (and it normally will be) and your payment is current, you can keep your car in bankruptcy. 

If you have fallen behind on payments and want to consider filing a Chapter 13 bankruptcy, contact us to set up a free consultation.