Filing for bankruptcy is a decision that can affect your life significantly. In fact, depending on the type of bankruptcy you file, your credit will be affected for up to 10 years. Besides your credit, you may also worry about additional ramifications – will bankruptcy affect my job search? Will I ever be able to buy a home? Will I be able to keep my car?
This last question is an important one, as those going through bankruptcy may need their vehicle to get to work, visit family, or run necessary errands such as getting food. The ability to keep your car is typically dependent on the type of bankruptcy you file.
Can You Keep Your Car After Bankruptcy?
There are two main types of bankruptcy: Chapter 7, which partially liquidates your assets, and Chapter 13, which allows you to keep your assets while paying a percentage of your debts. What happens to your vehicle in these proceedings depends on which bankruptcy you file – and how much equity you have in your car or truck.
Since your vehicle is listed as an asset, creditors may pursue it, especially if it has a good amount of value. Your car may, however, be granted an exemption that protects it from being repossessed. Here are the factors which will be considered:
– Type of bankruptcy
– Whether you own, lease or finance the vehicle
– The value of the vehicle
– What exemptions apply
What Happens to Your Vehicle in Chapter 7?
Filing for Chapter 7 bankruptcy may require selling or surrendering assets to pay off debts. The items that are considered exempt from liquidation varies by state.
If you file for Chapter 7 bankruptcy, you can keep the vehicle as long as you’re current on your loan payments and the value of the vehicle is less than the exemption.
How do I know how much equity I have in my car? Subtract what you owe from the car’s value. Once you’ve calculated how much equity you have in your car, research what the motor vehicle exemption is in your state. In Florida, the exemption is $1,000.
If the equity in your vehicle exceeds the exemption limit, there are a few possible avenues:
- You may enter into a buy-back arrangement with the Trustee for the overage on your exemption and keep the vehicle. This is the most common situation.
- In rare cases, the bankruptcy trustee may sell your car, give you the exempted amount, and pay out the rest to creditors.
- If you are not up to date on your loan payments, the lender can repossess the car after the bankruptcy stay is lifted at the completion of your Chapter 7 case. A car or truck is not protected by the exemption if the loan is delinquent. In limited cases, an individual may be allowed to retain the car by paying the loan off in one lump sum or modifying the loan to return to good standing.
- You may surrender the vehicle to the lender and discharge the personal liability to them so that they cannot sue you for a deficiency judgment.
What Happens to Your Car When Filing Chapter 13?
Chapter 13 operates differently than Chapter 7. Instead of liquidating non-exempt assets to reimburse creditors, a debt repayment plan will be initiated. Property is not sold off; instead, finances are restructured. If you own your car without a loan, you’ll be able to retain it. You can also retain your car if it’s financed by continuing to pay on the loan, or if you are in default, by curing the arrearage through the plan payments.
In some cases, if you’ve financed the car for more than 910 days, you may be able to force the finance company to reduce the principal amount of your loan.
The repayment periods last either three or five years. Once the end of the period is reached, remaining debts such as credit card debt may be discharged. However, debts such as mortgages and student loans cannot be forgiven.
Chapter 13 bankruptcy debts:
- Priority debts: These debts are required to be repaid in full. Types of priority debt include bankruptcy expenses, unpaid tax bills from the past three years, and child and spousal support.
- Secured debts: These types of debts are backed by collateral. A car loan is a type of secured debt. You can keep your car by continuing to pay on your auto loan, and if you are behind on your payments and still have your car, you can cure the default on the loan by paying arrears through the Chapter 13 Plan.
- Unsecured debts: These will be discharged after you’ve completed your repayment plan.
The law firm of Richard V. Ellis is here to help you to navigate the bankruptcy process and answer all of your questions. Whether you are hoping to keep your car or want to understand more about how bankruptcy affects your credit, we’re here to help. Call today for an initial consultation.