The bill collector calls you and everyone you know, your paycheck is about to be cut and you can barely pay your bills. You know you need to file for bankruptcy. So what’s stopping you, the fear of losing your car, truck or motorcycle?
In most cases when you file for bankruptcy, you can keep your vehicle. Of course, this is a little more complicated than just filing for bankruptcy. Don’t worry about your car. This article will explore some of the scenarios I have worked with in the past regarding bankruptcy and client vehicles. Motorcycles come with a caveat, here they go… Motorcycles are a bit different from other vehicles in that they can be classified as an unnecessary luxury item so contact your attorney to see what your specific choices are regarding motorbikes.
The Scenario in Chapter 7 The Beginning of a New Bankruptcy.
Scenario 1. You don’t owe the car anything and it’s not really worth it. You don’t make enough money to cover even your basic needs, you have a car and you don’t want to lose it. Chances are if you own a car in this situation, you own it outright. Whether you can keep it or not will depend on the value of the car. In Washington, for example, the car exemption for an individual is $3450.00. Washington also allows a $3000.00 wildcard exemption. If your car is worth $4500.00 in its current state, one can use the full motor vehicle exemption and then use $1050 of the wildcard. That will completely protect your car and still save $1950.00 on your wildcard. Your car is safe.
Scenario 2. You don’t owe anything for the car but it’s worth more than the redemption value. This is the most complicated scenario in chapter 7 bankruptcy and is probably better covered in chapter 13. However, there is an option in chapter 7. Let’s say the car is worth $10,000.00. As discussed above, you can use the current vehicle exemption of $3450.00. You can then add a $3000.00 wild card exemption. That protects the $6450.00 value in the vehicle. means you have $3550.00 unprotected. Now we have a few options.
You can:
1) Let the trustee pick up and sell the vehicle and use the proceeds to pay off some of your creditors. If you do this, the trustee will withhold your check for $6450.00 and use the unprotected $3450 to pay off some of your creditors. You can then use this money to help get a new car or buy a used car right away.
2) Try to strike a deal with the trustee to pay back any non-exempt equity. Guardians are usually willing to come up with a reasonable payment plan to allow you to keep something like a vehicle. Common terms might be to pay back equity in six equal installments, or make a down payment with monthly payments ending in a larger payment when you get your tax return. You should be careful with these useful charges, if you fail to pay, your debit may be denied or revoked.
3) Try to get a new loan on the car after the bankruptcy is over which will allow you to pay equity to the trustee. You will then have a car payment to pay for the newly issued loan.
Scenario 3. You owe the car less than the car is worth. If you want to file for chapter 7 to get a fresh start and avoid paying the chapter 13 trustee, you need to be able to protect the car. Let’s say the car is worth $15000.00 and you still owe $12000.00. In this case you have $3000.00 in equity. Since the release of the car is worth more than the equity you have in the vehicle, your car will be protected. You will need to talk to your attorney about what to do during and after the case, but you will have to maintain your loan payments if you want to keep the vehicle.
Scenario 4. You owe the car more than it’s worth. In this scenario you may owe, for example, $15000.00 for a car that is only worth $7000.00. You have several options under this scenario.
You can:
1) decided to give up the car. Why pay more than double the value of anything? You can surrender the vehicle and then seek to purchase a vehicle on better terms upon release;
2) You can continue to pay for the vehicle on the terms specified in the loan agreement;
3) We can look for a redemption loan wherein you get a new loan that is only up to the value of the car in its current condition. In this case you will have to qualify for a new loan and there may be additional attorney fees, but it can potentially save you a lot of money and keep you in the car you love.
Scenario 5. Bonus Scenario! You have non-exempt equity in your vehicle, but you also have tax liens attached to personal property. This one is a little tricky, but if you have no other equity in the other property and the amount of the tax lien is greater than the non-exempt equity in your vehicle, the trustee will not bother you or your vehicle. The downside is that if they take and sell the car for non-exempt equity, they will then use that money to pay off or pay your tax lien. If the trustee leaves you and your vehicle alone, you’ll still have to find a way to deal with those taxes once your bankruptcy is over.
Scenarios in Chapter 13 payment plan bankruptcy:
Scenario 1. You don’t owe your car anything and it’s worth less than the exempt amount. Under this scenario, your vehicle will have no impact on your chapter 13 pack payments.
Scenario 2. You don’t owe your car anything but it’s worth more than the recoverable amount. In this scenario, we must offer creditors unqualified value in the form of your trustee payment. While this goes beyond the scope of this article, we may pay the non-exempt value through trustee payments over a period of time lasting 60 months. This is a valuable tool if you have a car that is worth a lot of money and you can’t bear to part with it.
Scenario 3. You owe money on a car and you want to keep it. This scenario gets complicated depending on whether the loan on your car was taken out at the time you bought the car. It is also important for how long you buy the car. If you purchased a car more than 910 days ago, we may lower the amount you paid for the car based on its current value. So let’s say that you owe $15000.00 for the car but are only worth $7000.00, we can propose a plan that only pays the lender back $7000.00 as a guaranteed claim. We may also lower interest payments on cars depending on the rate the loan is for and depending on the jurisdiction. If you bought the car less than 910 days ago, we may still be able to lower the interest rate you paid on the car, but the full dollar amount of the outstanding loan must be repaid as a secured creditor.
Scenario 4. You owe money on a car and you don’t want it anymore. In this scenario, chapter 13 could also be a good choice depending on your other financial situation. We can propose a plan that delivers collateral. The lien holder will come and take the car. They must then sell it and credit your account for the amount of the sale. In chapter 13 they can then file an unsecured claim for the remaining balance. The benefit to you is that you will end up paying less than you owe (perhaps zero) and paying no further interest on the loan.
Conclusion: As you can see, there is no simple answer to what happens to cars that go bankrupt. The good news is that there are many options that will allow you to keep your vehicle and there are still other options that will allow you to escape a bad deal. If you find yourself in financial trouble and the thought of losing your only car is stopping you from filing, contact your local bankruptcy attorney to discuss which option is best for you.