The bill collectors are calling you and everyone you know, your wages are on the verge of being garnished, and you can barely pay for essentials. You know you have to file for bankruptcy. So what keeps you from the fear of losing your car, truck or motorcycle?
In most cases, you can keep your vehicle if you file for bankruptcy. Of course it’s a bit more complicated than just filing for bankruptcy, don’t worry about your car. This article examines several scenarios I have dealt with in the past when dealing with customer bankruptcies and vehicles. Motorcycles have one caveat, here it is… Motorcycles are slightly different from other vehicles in that they can be classified as unnecessary luxury items. Therefore, consult with your attorney about your specific options when it comes to motorcycles.
Scenarios in a Chapter 7 bankruptcy proceeding.
Scenario 1. You don’t owe anything for the car and it’s not worth that much. You don’t even make enough money to cover your basic needs, you have a car and you don’t want to lose it. In this situation, if you have a car, chances are you own it outright. Whether you can keep it or not depends on the value of the car. For example, in Washington, the road tax exemption for one person is $3450.00. Washington also allows a wild card exemption of $3000.00. If your car is worth $4500.00 in its current condition, a person can claim the full motor vehicle exemption and then use $1050 of the wild card. This will fully protect your car and still save $1950.00 on your wild card. Your car is safe.
Scenario 2. You don’t owe anything for the car, but it’s worth more than the allowance. This is the most complicated scenario in a Chapter 7 bankruptcy and is better covered in Chapter 13. Still, there are options in Chapter 7. Let’s say the car is worth $10,000.00. As discussed above, you can take advantage of the current vehicle exemption of $3450.00. You can then add the $3000.00 wildcard exemption. This protects $6450.00 worth in the vehicle. which means you have $3550.00 unprotected. Now we have a few options.
1) Have the trustee take over and sell the vehicle and use the proceeds to pay off some of your creditors. If you do, the trustee will write you a check for $6450.00 and use the unprotected $3450 to pay some of your creditors. You can then use this money to help buy a new car or buy a used car directly.
2) Try to negotiate a deal with the trustee to pay back the unexempted equity. Trustees are usually willing to work out a reasonable payment plan so you can keep something like a vehicle. Common terms might be to pay back the equity in six equal installments, or make a down payment in one monthly payment that ends up in a larger payment when you receive your tax refund. You have to be careful with this useful charge, if you default on your payments your release could be denied or revoked.
3) Try to get a new loan on the car after the bankruptcy is complete, which would allow you to pay the equity to the trustee. You would then have an auto payment to pay off the newly created loan.
Scenario 3. You owe less on the car than the car is worth. If you want to file a Chapter 7 to get a fresh start and avoid a Chapter 13 escrow payment, you should be able to protect this 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 equity. Since road tax is worth more than the equity you have in the vehicle, your car will be protected. You’ll need to talk to your attorney about what to do during and after the case, but you’ll need to keep your loan payment up if you want to keep the vehicle.
Scenario 4. You owe the car more than it’s worth. For example, in this scenario, you might owe $15,000.00 for a car that is only worth $7,000.00. In this scenario, you have several options.
1) decide to let go of the car. Why pay more than double the value of anything? You could give up the vehicle and try to buy a vehicle on better terms after release;
2) You could continue to pay for the vehicle on the terms set out in the loan agreement;
3) We could apply for an amortization loan, giving you a new loan that is only equal to the car’s value in its current condition. In this case, you’ll need to 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 don’t have tax-exempt equity in your vehicle, but you also have tax liens associated with personal property. This is a little tricky, but if you don’t have other equity in another property and the amount of the tax lien is greater than the non-exempt equity in your vehicle, the trustee is unlikely to deal with you or your vehicle. The downside to this is that if they took the car for the non-exempt equity and sold it, they would then use that money to pay off or pay off your tax lien. If the trustee leaves you and your vehicle alone, you still need to find a way to deal with those taxes once your bankruptcy is complete.
Chapter 13 Bankruptcy Scenarios:
Scenario 1. You owe nothing for your car and it is worth less than the exempt amounts. In this scenario, your vehicle would not affect your Chapter 13 plan payment.
Scenario 2. You don’t owe anything for your car, but it’s worth more than the exempt amounts. In this scenario, we must offer creditors the untaxed value in the form of your escrow payment. This is beyond the scope of this article, but we can pay the deductible via escrow payment over a period of up to 60 months. This is a valuable tool when you have a car that’s worth a lot of money and you can’t bear to part with it.
Scenario 3. You owe money for the car and want to keep it. This scenario gets complicated depending on whether the loan for your car was taken out at the time of the car purchase. It also matters how long it has been since you bought the car. If you bought the car more than 910 days ago, we can aggregate the amount you pay for the car based on its current value. Let’s say you owe $15,000.00 for the car, but it’s only worth $7,000.00. We can propose a plan that repays this creditor as little as $7,000.00 as a secured claim. We can also lower the interest payment on the car depending on the loan amount 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 pay on the car, but the full dollar amount of the outstanding loan would have to be repaid as a secured creditor.
Scenario 4. You owe money for the car and just don’t want it anymore. A Chapter 13 can also be a good option in this scenario, depending on your other financial situation. We can propose a plan that gives up the collateral. The pledgee comes and picks up the car. You must then sell it and credit your account with the sale amount. In chapter 13 you can then register an unsecured claim for the remaining amount. The benefit to you, however, is that you end up paying less than you owed (possibly zero) and paying no further interest on the loan.
Bottom Line: As you can see, there is no easy answer to what happens to a car in bankruptcy. However, the good news is that there are many options to keep your vehicle and still other options to escape a bad deal. If you’re struggling financially 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.