One of the primary worries for individuals who declare bankruptcy is retaining their vehicle—more so than keeping a house, according to a recent study. For many people facing financial difficulties, having access to a car serves as a lifeline. The reassuring reality: the bankruptcy system is structured to enable people to retain ownership of their car. In fact, some individuals go as far as filing for bankruptcy solely to safeguard their precious wheels.
Individuals filing for Chapter 7 bankruptcy have the option to “reaffirm” their loan or choose to purchase the car outright. Chapter 13 bankruptcy provides a structured plan for individuals to continue payments on their car loan and other debts. However, it should be noted that both bankruptcy options require several steps for those seeking to retain ownership of their vehicle.
Filing Bankruptcy When You Own Your Car
When you file for Chapter 7 bankruptcy and own your car, the process begins with a secure loan that is attached to the car. This loan is considered a secured debt, and how you handle it can be influenced by the vehicle’s equity and the amount you owe on your car loan. You must provide a “statement of intention” within 30 days of your bankruptcy filing or by your case meeting date, whichever comes first. This statement outlines whether you wish to keep your car or surrender it to the car lender.
If you choose to keep your car and make monthly payments, you might need to sign a reaffirmation agreement. This agreement is a legally enforceable contract that states you will continue making payments on your vehicle loan in exchange for keeping the car. However, if you default on these payments, you risk losing your car and being held accountable for any loan balance.
On the other hand, if your car is worth less than the amount owed, Chapter 13 bankruptcy may be a better option. This type of bankruptcy allows you to restructure your debts and often involves adjusting the monthly payments to the car lender, often reducing them. You can maintain ownership of your car while making these adjusted payments throughout a 3-5 year plan. Remember, it’s vital to stay current with these payments, or you risk losing your vehicle.
How Much Is My Car Worth?
To accurately assess your car’s worth concerning filing for bankruptcy, you need to determine your car’s fair market value. The fair market value is what your car would sell for in its current condition in your geographic area. This is an important figure when considering either Chapter 7 or Chapter 13 bankruptcy, as it can influence whether you can keep your car.
One way to determine the fair market value is to consult reputable automotive valuation guides such as Kelley Blue Book or Edmunds. These resources provide estimates based on your car’s current condition, make, model, year, and mileage. You can also check local dealership websites and classifieds for similar vehicles for sale.
Once you know your car’s fair market value, compare it with any existing loan balance. If you owe more than the car’s worth, both Chapter 7 bankruptcy and Chapter 13 bankruptcy may offer ways to keep your car while treating the debt.
In Chapter 7 bankruptcy, if your car’s current fair market value falls under a certain limit, you can use the bankruptcy exemption to protect it from being sold to repay your creditors. In Chapter 13 bankruptcy, the fair market value of your car comes into play in determining your repayment plan.
It’s important to obtain an accurate value for your car when considering bankruptcy to ensure you make the best decision for your financial situation.
What Is A Bankruptcy Motor Vehicle Exemption?
Bankruptcy exemptions play a crucial role in determining what assets, including cars and other vehicles, you get to keep when you file for bankruptcy. Notably, these exemptions vary widely from state to state. While Chapter 7 bankruptcy involves liquidating your assets to repay creditors, it doesn’t mean you lose everything. Bankruptcy exemptions are designed to protect essential property, including a certain amount of equity in your vehicle, also known as the “car exemption.”
Most states have their own set of bankruptcy exemptions, and the exemption amount for a car varies in each. However, as many as 31 states allow you to choose between state exemptions and federal exemptions. The federal exemption amount for a car in bankruptcy is $4,000. If your vehicle’s equity is less than this amount, it’s generally safe in Chapter 7 bankruptcy.
There are also wildcard exemptions, which can be applied to any property you own. If your car’s equity exceeds your state’s exemption limit, you could use a wildcard exemption to cover the difference. For instance, if your state’s car exemption is $3,000, but your car’s equity is $4,500, you could use $1,500 of a wildcard exemption to protect it fully. The federal wildcard exemption adds an additional $1,325 to the $4,000 federal exemption if the homestead exemption isn’t used entirely.
When filing for bankruptcy, you need to identify certain assets known as legally exempt property. This is done through the use of Schedule C, which comprises a comprehensive list of the property you’re allowed to keep under Chapter 7 bankruptcy. Additionally, the property can also be included in A/B, under assets. Ensure that you provide a clear and consistent description of the property to avoid any confusion.
It’s worth noting that these exemption amounts apply to each individual. So, if you’re married and filing jointly, these amounts could potentially be doubled. However, to ensure the best outcome when filing for bankruptcy, it’s important to consult with a bankruptcy attorney who is familiar with the exemption laws and bankruptcy law in your state.
Bankruptcy Filing When You Do Not Own The Car
If you’re making monthly payments on an auto loan and decide to file bankruptcy, the process may vary based on the bankruptcy type and your unique circumstances. The crucial factor here is the vehicle equity, which is determined by subtracting the outstanding loan amount from the car’s fair market value. If you have equity in the car, the bankruptcy trustee will consider this when evaluating your assets.
In a Chapter 7 bankruptcy, if your vehicle equity is less than the exemption amount in your state, you may be able to keep your car by continuing to make the monthly payments on the auto loan. The bankruptcy trustee does not usually interfere with secured debts, such as auto loans, as long as you can maintain the payments and the equity is within the exemption limit.
However, if your vehicle equity exceeds the exemption limit, the bankruptcy trustee might choose to sell the car to repay your unsecured debt. The trustee would then pay off the auto loan and return any remaining money to you, up to the exemption limit. The rest would be used to repay your unsecured debts.
In a Chapter 13 bankruptcy, you can usually keep your car regardless of the car equity, provided you continue making your monthly payments. This bankruptcy type allows you to restructure your debts into a manageable repayment plan, typically over three to five years. In some circumstances, you may even be able to reduce the amount owed on the auto loan through a process called “cramdown”.
Regardless of the type of bankruptcy you file, it is critical to thoroughly understand the exemption laws in your state and how they might apply to your situation. Consulting with a bankruptcy attorney can provide clarity and help you navigate the complexities of the bankruptcy process.
Redeeming Your Vehicle’s Current Replacement Value
Retaining your vehicle during Chapter 7 bankruptcy, even if its value exceeds the exemption limit, is possible through a process called “redeeming.” By paying the remaining current replacement value to the lender, you can become the sole owner of your car. However, it’s important to note that this option is not commonly pursued due to the significant cash requirement. Only a small fraction, less than 2%, choose this route.
A reaffirmation agreement is a legal contract that reaffirms your commitment to pay off an existing debt. In the context of bankruptcy and motor vehicles, if you want to keep your car while filing bankruptcy, you might decide to sign a reaffirmation agreement with your car lender. This means you’re agreeing to continue making payments on your car according to the terms of the original contract, despite the bankruptcy filing.
The agreement typically includes the original terms of the loan, such as interest rates and payment plan schedules, and it must clearly state your current loan balance. Before signing, it’s crucial to consult with a bankruptcy attorney who can guide you through the process and ensure the agreement is in your best interest. Once the reaffirmation agreement is signed by both parties, it must be filed with the bankruptcy court.
By signing a reaffirmation agreement, you’re essentially waiving the discharge of the debt related to your car that would otherwise be released in bankruptcy. This is a significant decision with long-term financial implications, so it’s vital to ensure you’ll be able to maintain the payment plan even during financially difficult times. Remember, bankruptcy is designed to give you a fresh start, and reaffirming a debt should be carefully considered and discussed with a bankruptcy attorney.
Joshi Law Group
At Joshi Law Group, we specialize in bankruptcy law, offering personalized legal advice tailored to your unique financial situation. If you’re facing bankruptcy and concerned about the fate of your vehicle, reach out to us. With our in-depth understanding of both Chapter 7 bankruptcy and Chapter 13 bankruptcy, we can guide you through the process, helping you evaluate options like exemption laws, redemption, reaffirmation agreements, or even a “cramdown” under a Chapter 13 filing to potentially reduce your auto loan amount.
We’ll work diligently to help you retain your vehicle while paving the way for your financial fresh start. To discuss your case and discover the best approach to keep your vehicle while navigating bankruptcy, don’t hesitate to call Joshi Law Group today.
Our Bankruptcy Attorneys Can Help
We understand that filing for bankruptcy involves complex legal procedures and comprehensive paperwork. Hiring a bankruptcy attorney from our firm aids in navigating these complexities. A bankruptcy lawyer is instrumental in helping you understand the nuances of a bankruptcy filing, such as accurately completing the requisite bankruptcy paperwork and representing you in bankruptcy court.
Moreover, an attorney can competently handle the entire bankruptcy case, making the process smoother and more manageable for you. A critical advantage of hiring a bankruptcy lawyer is their profound understanding of the bankruptcy code, which ensures your bankruptcy filing is done correctly, reducing the risk of any legal issues arising later.
The path to debt relief through bankruptcy depends largely on your unique financial situation, which your lawyer will assess in detail. Depending on the assessment, they will advise on whether to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, maximizing your chances of a successful discharge of debts. By meticulously evaluating your assets, income, and debts, your bankruptcy attorney can guide you toward a fresh financial start.
Hiring a bankruptcy attorney such as those at Joshi Law Group, substantially increases your chances of achieving satisfactory results in your bankruptcy case. They provide invaluable assistance every step of the way, from initial consultation to eventual debt relief, ensuring the best possible outcomes during this challenging financial time.
Start Your Debt-Free Life Today
At Joshi Law Group, our experienced bankruptcy attorneys have helped numerous clients regain their financial footing through bankruptcy. We understand that this is a difficult time for you, and we are here to guide you every step of the way.
Don’t let overwhelming debt control your life any longer. Contact us today for a free consultation and take the first step towards a debt-free future. Our team of dedicated bankruptcy attorneys is ready to listen to your story and help you find the best path forward toward financial stability. Let us help you take control of your finances and start a new, debt-free chapter in your life.
Frequently Asked Questions
What happens to my car loan when I file for bankruptcy?
When you file for bankruptcy, your car loan is treated as a secured debt. Depending on the type of bankruptcy filed (Chapter 7 or Chapter 13), the treatment of your car loan may differ. You might be allowed to continue making car payments and keep the vehicle, or the bankruptcy trustee might sell it to repay debts.
Can I keep making car payments during bankruptcy?
Yes, in both Chapter 7 and Chapter 13 bankruptcy, you’re often able to keep your car by continuing to make monthly payments on the auto loan, provided the vehicle’s equity is within the exemption limit set by your state.
How is the amount of equity in my car determined?
The amount of equity in your car is determined by subtracting any outstanding loan amount from the car’s fair market value. If the car’s market value is higher than the remaining loan balance, you have equity in the car.
What is the role of the bankruptcy court in dealing with my car loan?
The bankruptcy court oversees all bankruptcy proceedings. If you decide to sign a reaffirmation agreement for your car loan, the agreement must be filed with the bankruptcy court. The court ensures all the procedures are followed as per the bankruptcy code.
What is a motor vehicle exemption in bankruptcy?
A motor vehicle exemption allows you to set aside a certain amount of equity in your car that cannot be reached by creditors in a bankruptcy case. The exact amount of this exemption varies by state. If your vehicle’s equity is less than the exemption amount in your state, you may be able to keep your car during bankruptcy.