If you're thinking about filing a Chapter 7 bankruptcy, you may be wondering if you can keep your car. The answer? Maybe. Whether or not you can keep a vehicle during a Chapter 7 bankruptcy depends on a few factors.
Your Car in Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a liquidation bankruptcy. It’s a short process that typically lasts only three to six months, during which time a court-appointed trustee is assigned to your case.
Your trustee's job is to sell your non-exempt property in order to repay your creditors at least part of what you owe them. After a successful Chapter 7 bankruptcy, any remaining unpaid debt is wiped out with the discharge.
Your car could be a large asset for liquidation if it has a lot of equity. This equity can be used to repay not only your auto lender, but other creditors – that is, if you aren't able to cover the value with a vehicle exemption.
An exemption is a bankruptcy rule that allows you to protect property that's necessary for daily life during bankruptcy. Exemptions vary by state, but there's a federal bankruptcy exemption system which can be used in some cases, as well.
Make sure you understand the exemption laws in your state before you file, so that you're able to protect the personal property you need to. Whether a motor vehicle exemption covers your car depends on how much equity you have.
Keeping the Vehicle You Own with Exemptions
If you own your vehicle outright, the value of your car is its equity. If you have an auto loan, your equity is equal to the value of your vehicle, minus what you owe to a lender; negative equity is when you owe more on the loan than the car is worth.
If you own your vehicle and it's worth less than your state's motor vehicle exemption limit, you're able to use the exemption and keep it. However, if your car is worth much more than the exemption limit, chances are that the vehicle is going to be sold by your trustee.
When this happens, the trustee has to pay you the exemption amount allowed by your state, plus any fees associated with the sale of the car. So, if there's more equity than can be exempted, but the profit when all is said and done wouldn't be worth the trouble, your trustee may decline to sell it, in which case you can keep your vehicle.
Keeping a Financed Car
If you're financing a car that has equity, is covered by the motor vehicle exemption, and you're current on your loan, then you're all set. But, if you're financing a car that has non-exempt equity, you have to do a little more to keep your vehicle.
Whether there's equity or not, you have to be current on your loan before you can take any additional steps. If you're not current on the loan, the lender may be able repossess your car whether it's covered by an exemption or not.
In order to avoid this, you have two choices: redemption or reaffirmation. In order to redeem your vehicle, you have to pay its value to the lender in a lump sum. Reaffirmation is when you sign a new loan agreement and agree not to include the car in the bankruptcy, which means you have to keep paying on it throughout your bankruptcy and beyond.
Whether you choose to redeem or reaffirm your vehicle, the equity still has to be eligible for exemption in order for you to keep the car. If the motor vehicle exemption doesn't cover your equity, there are ways you can use additional exemptions to help.
For more details on those in your state, or for any additional questions regarding keeping your car during a Chapter 7 bankruptcy, make sure you speak with your bankruptcy lawyer or the trustee.
Trouble Keeping Your Vehicle?
If you're not able to exempt the equity in your vehicle, you may need a more affordable car to get you through. This isn't always easy during a Chapter 7 bankruptcy, but it could be possible. One thing's for sure, you're going to need to work with a lender that can handle bad credit borrowers, and Drivers Lane wants to help.
We're teamed up with a nationwide network of special finance dealerships that have lenders available to help people that are struggling with credit issues like bankruptcy. We'll get to work connecting you with a local dealer after you fill out our fast and free auto loan request form.