You may think that when you file for bankruptcy, you lose everything. However, that is not always the case. Indeed, you may have to sell off a lot of what you own to pay your debts. However, this depends on the type of bankruptcy you file. But you should know there are other ways a person can keep some of their most important possessions during bankruptcy. Especially if not having said item would make it impossible to ever get back on track financially. A reader recently asked, “Can I keep my car if I declare bankruptcy?” And the answer to that is a definite maybe. However, in many cases you will be able to hang on to your vehicle thanks to certain bankruptcy law exemptions. Let’s explore.
What Determines if I Can Keep My Car if I File for Bankruptcy?
There are two main types of individual bankruptcy. Chapter 7 liquidates assets to pay debts, while Chapter 13 focuses on debt restructuring. What happens to your car during bankruptcy depends on which type of bankruptcy you file.
It also depends on whether you lease, own, or are still financing your vehicle. Other factors include the amount of equity you have in the car and the blue book value. Throw on top of that any asset exemptions in your state. The combo of these will determine what happens to your car if you file.
What Are Asset Exemptions?
Exemption laws help keep people who file for bankruptcy afloat by allowing them to retain some essential personal property. The reasoning behind “exemptions” is that if a debtor is completely “ruined” and loses everything, it’ll be harder to rebound.
The whole point of filing for bankruptcy is to give a person a chance for a clean slate. If instead it leaves an individual without any means, there is no purpose in filing. The idea of bankruptcy is to assist the indebted so they can once again become contributing, tax-paying members of society.
It’s difficult to get back on your feet if you have no clothes, no home, and no car. This is the logic behind offering asset exemptions. These exemptions vary by state, as to what assets are exempt and how much you can claim for them. There are federal asset exemption laws as well, and in some cases a person can choose to use those instead. But when filing for bankruptcy, you must select either the federal or state exemptions, not both.
Can I Keep My Car if I Don’t Own It?
If you’re leasing your car, bankruptcy exemptions won’t be relevant. A different set of rules applies to leases in bankruptcy. If you’re leasing, your car is not considered an asset since you don’t own it. If you want to keep leasing the car, you’ll have to keep up your payments. Otherwise, you’ll lose the car. It’s like renting an apartment that way.
However, if you’ve purchased your vehicle, you will have to list your car as personal property on your bankruptcy application. This is true whether you own it free and clear, or still have a car loan to pay off.
However, if you are delinquent on your car loan, the lender can repossess your car and asset exemptions don’t count. If you’re behind on payments, you’ll have to somehow make up the arrearages and keep paying monthlies after you file. If not, you’ll likely lose the car.
How Do I Calculate if I Can Keep My Car in Bankruptcy?
If you’re thinking of filing for bankruptcy, you should calculate how much equity you have in your car beforehand. That will also give you a better idea of whether to file for Chapter 7 or Chapter 13. This is important if you don’t want to lose your car.
Calculating how much equity you have in your car is the first step in determining if you can keep it. Here is how to find that number:
- Find out your car’s value. Check the National Automobile Dealers Association and Kelley Blue Book to get estimates.
- Subtract any outstanding car loan balance. If you’re still paying it off, this means deduct the amount it would take to pay the loan in full.
- Figure out how much you can protect with an exemption. The current federal exemption rate for one car is $4,450. A married couple can claim that exemption for two cars ($4,450 for each car). However, that’s if your state allows you to use the federal exemption. And, in many cases you may be better off — or required — to take the state exemption. A quick Google search can probably give you an idea of your state’s motor vehicle exemption.
How Do Exemptions Factor Into It?
If the value of your car is less than your state’s exemption, you can keep the car. This is “exempt equity.” Any portion not covered by an exemption is “nonexempt equity.”
If your car’s equity value is more than your state’s exemption, you should be careful when filing for Chapter 7. This is because the court could decide to sell off your car to pay your creditors. However, you would still get to keep the exemption amount before they use the surplus to pay your debts.
You may be able to include a “wildcard” exemption as well. The wildcard is an exemption amount some states offer for items that would otherwise be considered nonexempt. Some states allow filers to take both the state vehicle and wildcard exemption together. This is another way you might be able to keep your car when filing.
The exemption part of the calculation can get a little confusing since there is so much variability by state. This is one of many reasons it’s a good idea to consult with a bankruptcy lawyer. You want to use your exemptions wisely.
How Else Might I Keep My Car in Bankruptcy?
If you want to keep your car, but are just behind on payments, Chapter 13 may be a better option. That is because Chapter 13 is a debt restructuring plan that you pay off over 3-5 years. Your personal property is not sold off in Chapter 13. And you might even be able to negotiate down the amount you owe on your vehicle.
If you own your car outright, but have other debts, filing Chapter 13 would also spare your car. Again, this is because there is no asset liquidation to pay creditors under Chapter 13.
Additionally, most people filing for bankruptcy will find that their car’s equity is less than the exemption. This is because cars tend to depreciate rapidly. Accordingly, the fair market value is likely a lot less than when they bought it.
The bottom line, however, is that for most people their car is typically one of their most important possessions. Filing for bankruptcy is not a “quick fix” and if you don’t do it right, you could end up without wheels. Before you move forward with Chapter 7 or 13, make sure you know exactly how that will affect your vehicle. That is, unless you like walking everywhere.
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Kimberly Dawn Neumann
Kimberly Dawn Neumann is a multi-published NYC-based magazine and book writer whose work has appeared in a wide variety of publications ranging from Forbes to Cosmopolitan. She graduated summa cum laude from the University of Maryland, College of Journalism. For more, visit: www.KDNeumann.com, Instagram @dancerscribe, and Twitter @KimberlyNeumann