When you file a Chapter 7 bankruptcy, whether or not you get to keep your vehicle depends on a number of factors. We're looking at what could be in store for your car in this short bankruptcy process.
Owning a Vehicle When You File
If you own a vehicle free and clear when you file for Chapter 7 bankruptcy, you may be able to keep it if you can cover its value with an exemption. If you can't cover the equity in your car, your bankruptcy trustee usually liquidates your vehicle with your other nonexempt property in order to repay your creditors.
There are typically two exemptions that can cover the value of your car: a motor vehicle exemption or a wildcard exemption. In some cases, you may be able to combine the exemptions to cover all the equity in your car.
Exemption limits vary by state, so just how much vehicle value you're allowed to keep varies. However, there's a federal bankruptcy exemption limit, too. Some states allow you to choose whether to use the state limit or federal limit.
For example: If you own a car worth $4,000 and your state vehicle exemption limit is only $3,725, you won't be able to protect the equity in your car. But, as of April 2019, the federal exemption limit is $4,000. So, if you're in a state that allows you the choice, you could take the federal exemptions and retain ownership of your vehicle.
If you're unsure how to handle your car when it comes to filing Chapter 7 bankruptcy, it's a good idea to talk to your trustee, or get help from a licensed legal professional before you fill out your paperwork for filing. They can make it easier to understand your state’s specific options more thoroughly.
Filing With a Financed Car
If you file for Chapter 7 bankruptcy and have an auto loan, you must be current on payments in order for you to keep it. You also have to be able to continue making your payments throughout your bankruptcy process, which typically lasts around four to six months in a Chapter 7, and be able to cover the vehicle value with an exemption.
If you can't cover the equity in your car, or your loan is past due, you're likely to lose your vehicle to a repossession unless you qualify to either redeem your loan, or enter a reaffirmation agreement with the lender.
- To redeem your car, you must pay the lender the current market value of your vehicle in one lump sum.
- To reaffirm your loan, you enter into a new agreement with your lender that may have modified terms which allow you to keep your car, and continue paying on it.
If you're behind on payments, your lender isn't under any obligation to do these things, so it's in your best interest to talk to them and your trustee to see what your options are. You need to make a decision about your vehicle before you can file your final bankruptcy paperwork.
If You Can't Save Your Vehicle in Chapter 7
If you're unable to save the car you currently have, your bankruptcy trustee sells it to collect the value. This is a part of the process of a Chapter 7 bankruptcy. It's known as a liquidation bankruptcy, and your trustee is appointed with the power to sell your assets in order to pay down as much of your debt as possible. If you successfully complete your Chapter 7 bankruptcy, the rest of your unsecured debts are wiped away after your bankruptcy is discharged.
But, what if you can't save your vehicle and still need transportation? This is covered by the motor vehicle exemption. If your car is worth a lot of money, say a newer luxury vehicle worth around $12,000, your trustee can sell it, and give you the amount of money that would have been exempt. This gives you the cash to purchase an affordable car to serve your needs until you are finished with your bankruptcy.
Your trustee could also allow you to apply for additional debt in the form of an auto loan. However, not all lenders work with people who are going through bankruptcy. It's important that you go to the right kind of dealership.
Getting a Car With Chapter 7 Bankruptcy
If you're going through a bankruptcy or have recently finished one and need a vehicle, chances are you need to find a subprime lender. Bankruptcy can really take a toll on your credit score, and you may not be able to get approved with a traditional lender.
Here at Drivers Lane, we have cultivated a nationwide network of special finance dealers that have the lenders you need to see you through your Chapter 7, and get the car loan you need. To be matched to a bankruptcy auto lender in your area, simply fill out our no-obligation car loan request form.