The decision to file for Chapter 7 or Chapter 13 bankruptcy isn’t one to enter into lightly. The consequences of taking this drastic action can affect your credit score for up to 10 years. However, when you can’t keep your head above water with your debts, bankruptcy can be the last resort to get a fresh start with your finances.
If you need to file for bankruptcy, you should understand what will happen during this process under each bankruptcy chapter. With Chapter 7, some of your assets will be liquidated while Chapter 13 will put more focus on repaying your debts. Naturally, you might be wondering what will happen to your car when you choose either of these options to get out of debt.
Macco & Corey P.C. is the trusted law firm you need with specialization in bankruptcy cases. Our expertise in bankruptcy and its impact on your assets, including your cars, can help you make the right decision in your circumstances. Read on to understand more about this process and how a bankruptcy attorney can help.
Can I Keep My Car After Filing Bankruptcy?
One of the biggest concerns for those sinking into deep debt is what will happen to their car. The answer to this question will depend on your circumstances. Your vehicle is an asset, hence it may be something your creditors will pursue when collecting on your debt.
In certain situations, your vehicle may be considered an exemption, which would protect it from repossession. It will depend on the type of bankruptcy you are filing for, too.
Other factors that may affect whether you keep the car or not are if you currently have a car loan, are leasing the vehicle, or if you own it. The value of your car along with any applicable exemptions may also be a determining factor on whether you can keep your car after bankruptcy.
Understanding What Happens to Your Car with Chapter 7 Bankruptcy
When you choose to file for Chapter 7 bankruptcy, it can help you remove unsecured debts. However, the downside is that you may be required to either sell or give up some of your assets to pay your debts. Which items are exempt from liquidation and the value that can be exempted will depend on the state you reside in.
In some states, bankruptcy laws may allow you to exempt all of the equity in your vehicle, which would mean you’d get to keep your car. However, you must be fully current on your loan payments. Additionally, when the market value of a vehicle that you own outright is less than the listed exemption amount, you can breathe a sigh of relief as you can keep the car.
Before you rely on a car exemption or see about a federal or state wildcard exemption, you must discuss these options with an attorney who is qualified to give you legal advice.
You’ll also want to determine how much equity you have in your vehicle, which can be done by subtracting your current loan balance from the value of the car. It’s important to consider depreciation, too. Vehicles depreciate more rapidly than other assets like real estate, and you may not have much equity unless you are approaching the end of your auto loan term.
After figuring out how much equity you have in your vehicle, you will want to check the motor vehicle exemption amount in your state. If your equity is less than this limit, you will not have to give up your car in Chapter 7 bankruptcy.
There are a few different scenarios that could happen.
The Trustee Can Sell It
The bankruptcy trustee managing your bankruptcy case can sell your vehicle and give you the exempted amount. They can then use the remaining sum to repay your creditors. Your trustee can also provide an option for you to pay off the equity at a discounted rate, which would allow you to keep the car.
Vehicle Repossession
If you’re behind on your car payments, the lender can repossess your vehicle. Vehicles are not safeguarded by exemptions when car loans are delinquent.
You may still be able to keep your car in Chapter 7 bankruptcy if you can pay the remaining car loan balance in one lump sum. Signing a reaffirmation agreement on your car loan is another option, allowing you to modify your car loan and reposition yourself in good standing with the lender.
Surrendering the Vehicle
Another option, perhaps the least attractive one, is to surrender your vehicle back to the lender. This will remove your responsibility for the loan after your bankruptcy, though you will be without a vehicle. Your credit will also suffer the consequences in a similar way to vehicle repossession.
Understanding What Happens to Your Car with Chapter 13 Bankruptcy
Chapter 13 bankruptcy is another option you may consider when your debts have gotten out of control. Instead of liquidating your assets that don’t have bankruptcy exemptions, you will start a debt repayment plan.
Under Chapter 13 bankruptcy, your finances are reorganized and you’ll work on repayment. Ideally, if you own your car outright, you won’t have to give it up.
This bankruptcy chapter categorizes debts into separate groups.
Priority Debts
All priority debts must be repaid in full and include your bankruptcy costs, unpaid tax bills over the last three years, and any child support or spousal support.
Secured Debts
A car in bankruptcy is considered a secured debt. When you are still making payments to the car lender, Chapter 13 bankruptcy may allow you to reduce the amount owed if you owe more than the car’s worth. With a repayment plan, you can catch up by making payments on your loan, which can help you keep the car.
Unsecured Debts
Unsecured debt is discharged in bankruptcy after the completion of the repayment plan. If you can’t catch up with making payments on your loan, you can get out of making monthly payments by surrendering your vehicle back to the car lender.
What If I Lease My Vehicle?
Things are different when you sign a lease. It’s a contract in which you agree to return the car to the creditors at the end of the lease period.
This gives you a couple of options with Chapter 7 or Chapter 13 bankruptcy. You can either assume the lease or surrender the vehicle. You will need to make an official declaration of your intentions to either keep your car or surrender it to bankruptcy court, the trustee, and the creditor. You will want to discuss the best course of action with your attorney first.
Protecting Your Car When Filing Bankruptcy
If you need to file for bankruptcy, the best way to keep your car is to make sure you own it outright.
Bankruptcy exemptions may also help you if the value of your vehicle is less than $4,450. This federal exemption is in place until 2025, though checking with your state’s bankruptcy exemption may prove fruitful as some will allow you to combine both federal and state exemptions.
How a Bankruptcy Attorney Can Help You Keep Your Car
Bankruptcy rules can get confusing, and a misunderstanding of them could mean you risk losing your car and much more. Whether filing for Chapter 7 bankruptcy or Chapter 13, you should discuss your situation with an attorney knowledgeable in all facets of these laws.
Macco & Corey P.C. can help you figure out the best way to obtain debt relief. Contact us today to help you take control of your debt.