Bankruptcy and your vehicle

Bill collectors are calling you and everyone you know, your wages are about to be garnished and you can barely afford necessities. 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, it’s a bit more complicated than just filing for bankruptcy, don’t worry about your car. This article will explore various scenarios that I have dealt with in the past related to bankruptcies and customer vehicles. Motorcycles come with a caveat, here it is… Motorcycles are slightly different from other vehicles in that they can be classified as luxury items that are not necessary, so contact your attorney to see what your specific options are regarding motorcycles.

Scenarios in a Chapter 7 Fresh Start bankruptcy.

Scenario 1. You owe nothing on the car and it’s not worth as much. You don’t earn enough money to cover even your basic needs, you have a car and you don’t want to lose it. Chances are, if you have a car in this situation, you own it outright. Whether or not you can keep it will depend on the value of the car. In Washington, for example, the automobile exemption for an individual is $3,450.00. Washington also allows a wild card exemption of $3000.00. If your car is worth $4500.00 in its current condition, a person could use the full motor vehicle exemption and then use $1050 from the wild card. That will fully protect your car and still save $1950.00 from your wild card. Your car is safe.

Scenario 2. You owe nothing on the car, but it is worth more than the value of the exemption. This is the most complicated scenario in a chapter 7 bankruptcy and may be better addressed in chapter 13. However, there are options 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 to that the $3000.00 wild card exemption. That protects $6450.00 of value in the vehicle. which means you have $3550.00 unprotected. Now we have a couple of options.

You could:
1) Let the trustee take and sell the vehicle and use the proceeds to pay off some of your creditors. If you do this, the trustee will write you a check for $6,450.00 and use the unprotected $3,450 to pay some of your creditors. You could then use this money to help get a new car or to buy a used car outright.
2) Try to reach an agreement with the trustee to pay the non-exempt principal. Trustees are usually willing to work out a reasonable payment plan that allows you to keep something like a vehicle. Common terms may be repaying the principal in six equal installments or making a down payment with a monthly payment that ends in a larger payment when you receive your tax refund. You should beware of this helpful arraignment, if you miss your payments your download could be denied or revoked.
3) Try to get a new car loan after the bankruptcy is over, which would allow you to pay the principal to the trustee. You would then have a car payment to pay off the newly incurred loan.

Scenario 3. You owe less on the car than the car is worth. If you’re looking to file a chapter 7 to get a fresh start and avoid making a chapter 13 trustee payment, you should be able to protect that car. Let’s say the car is valued at $15,000.00 and you still owe $12,000.00. In this case you have $3000.00 in equity. Because the car exemption 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 need to keep your loan payment if you want to keep the vehicle.

Scenario 4. You owe more on the car than it is worth. In this scenario, you could owe, for example, $15,000.00 on a loan because that’s only worth $7,000.00. You have several options in this scenario.

You could:
1) decides to release the car. Why pay more than double the value of something? You could trade in the vehicle and then look to purchase a vehicle with better terms after unloading;
2) You could continue to pay for the vehicle according to the terms provided in the loan agreement;
3) We might look into a redemption loan whereby you get a new loan that is only up to the value of the car in its current condition. In this case, you must qualify for the new loan and there may be additional attorney fees, but it could potentially save you a lot of money and keep you in a car you love.

Scenario 5. Bonus Scenario! You have nonexempt equity in your vehicle, but you also have tax liens that are attached to personal property. This one is a bit tricky, but if you have no other value in any other property and the amount of the tax lien is greater than the non-exempt value of your vehicle, the trustee probably won’t bother with you or your vehicle. The downside to this is that if they were to take and sell the car for the non-exempt capital, then they would use that money to pay off or reduce their tax lien. If the trustee leaves you and your vehicle alone, you will still have to find a way to deal with those taxes after your bankruptcy is over.

Scenarios in a Chapter 13 payment plan bankruptcy:

Scenario 1. You owe nothing on your car and it is worth less than the exempt amounts. Under this scenario, his vehicle would have no impact on his chapter 13 plan payment.

Scenario 2. You owe nothing on your car, but it is worth more than the exempt amounts. Under this scenario, we have to offer non-exempt value to creditors in the form of their trust payment. While this is beyond the scope of this article, we may pay the non-exempt value by paying the trustee over a period of time that can be up to 60 months. This is a valuable tool if you have a car worth a lot of money and you can’t bear to part with it.

Scenario 3. You owe money on the car and want to keep it. This scenario is complicated depending on whether your car loan was taken out at the time you purchased the car. It also matters how long ago you bought the car. If you bought the car more than 910 days ago, we can reduce what you pay for the car based on its current value. So let’s say you owe $15,000.00 on the car but it’s only worth $7,000.00, we can come up with a plan that only returns the creditor $7,000.00 as a secured claim. We can also reduce the interest payment on the car depending on the rate at which the loan is applied and depending on the jurisdiction. If you purchased the car less than 910 days ago, we may still be able to lower the interest rate you pay on the car, but the full dollar amount of the outstanding loan will need to be repaid as secured creditor.

Scenario 4. You owe money on the car and you no longer want it. In this scenario, a Chapter 13 may also be a good option depending on how the rest of your financial situation looks. We can propose a plan that delivers the guarantee. The holder of the link will come to pick up the car. They then have to sell it and credit your account for the amount of the sale. In chapter 13, they can file an unsecured claim for the remaining balance. However, the benefit to you is that you will end up paying less than you owed (possibly zero) and you will not pay any more interest on the loan.

Conclusion: As you can see, there is no simple answer to what happens to a car in bankruptcy. However, the good news is that there are many options that allow you to keep your vehicle and still other options that will allow you to escape a bad deal. If you’re in financial difficulty and the thought of losing your only car prevents you from filing, call your local bankruptcy attorney to discuss which option might be best for you.

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