How Long Can I Keep My Car After Filing Chapter 7?
Whether you can keep your car after filing Chapter 7 bankruptcy depends on the value of your car, whether you are currently behind on payments, and the laws in the state you live in.
In order to keep your car, you typically must:
- Already own the vehicle in full; or
- Be current on car payments
Otherwise, whoever you owe money to can take (repossess) the car to pay off what you owe. In addition to being current on payments, the equity you have in your car must be exempt from debt collection. These conditions are explained more fully below.
During a Chapter 7 bankruptcy, you generally only get to keep property that is exempt. Bankruptcy laws “exempt" property so that you have the ability to go to work, live in a home, and have a few other essentials. Bankruptcy is not intended to make you homeless and destitute.
The remainder (your nonexempt property) is sold and used to pay any unsecured debt from your creditors, such as credit card debt.
In some states, cars are exempt property up to a certain amount. There are also ways to avoid giving up nonexempt property when your car exceeds the exemption amount. A bankruptcy lawyer can help you make sense of your situation and whether keeping your car is possible in your state.
Requirements for Keeping Your Car
The requirements for keeping your car vary from state to state. Motor vehicle exemptions in each state allow you to keep a car for a certain amount of exempted money.
For example, in Nevada, you can keep a car with up to $15,000 in equity, but in Wisconsin, the limit is $4,000. You may also elect to use the federal exemptions, meaning federal law governs. Your bankruptcy lawyer can help you decide whether to use the state or federal exemptions.
Your equity in the car is the current fair market value minus how much you still need to pay on your car loan. If the vehicle is valued at $25,000, but your car loan has $15,000 left, you have $10,000 in equity. If your state exempts $10,000 or more in equity, you can keep the car. If it allows less, the bankruptcy trustees might sell your car.
Will Bankruptcy Trustees Sell Your Car in Chapter 7 Bankruptcy?
If the equity in your car is more than your state allows, the car might be sold to cover your debts. Using the example above, your car might be listed for sale near the market value of $25,000.
Let's say a buyer offers less than the car's worth, so it sells for $20,000. You still have the $10,000 in equity. The trustees will give you the $10,000 from the sale, the portion that is exempt. The remaining $10,000 will go to your creditors.
Your choice at this point would be to:
- Wait to buy a car in the future
- Purchase a lower-priced car
- Loan a lower-priced car (you might face high interest rates from the car lender because of the bankruptcy on your credit report)
Many people need a car to get to work or a truck to handle their work equipment. You may have options to stop repossession or the sale of your car. These options are discussed below.
Stopping Trustees From Selling Your Car in Bankruptcy
Your car may be essential for your job or kids, or it might have sentimental value. After filing Chapter 7 bankruptcy, you can talk with your attorney about keeping the car by:
- Using a wildcard exemption
- Offering other nonexempt property to cover debt
- Paying the trustees the exact amount of nonexempt equity (in the example above, this would be $10,000)
What Is a Wildcard Exemption?
A wildcard exemption is what it sounds like. Namely, it allows you to exempt whatever property you choose up to a certain amount. Some states do not allow wildcard exemptions to protect nonexempt property, however. If your state does, you can apply the wildcard exemption amount to the property of your choice.
Using the example above, you still own $10,000 in nonexempt value in your car. Let's say your state allows $5,000 in wildcard exemptions. You can use this and make up the remaining $5,000 yourself to keep your car.
Using Wildcard Exemptions Against Your Amount of Equity
Another option is to reverse the use of wildcard exemption and add it to the initial motor vehicle exemption in your state. Using the example above, adding the $5,000 wildcard exemption to the $10,000 equity brings the exemption total to $15,000.
This would still leave you $10,000 short to keep the car in the example above because the car's total market value was $25,000. You could consider a lump sum payment loan or a repayment plan. However, it can be hard to find lenders that want to add to this type of debt now that you have a bad credit score.
Using Other Exemptions To Keep Your Car
Wildcard exemption amounts vary in each state, but some states also allow you to carry over a balance from other exemptions. For example, if your homestead exemption is not used on your home, you can bring the remaining amount over to protect your car.
Note, however, that your state may also limit wildcard exemptions to personal property or not allow it to transfer to your car.
Feeling Stuck? Talk To An Attorney About Your Bankruptcy Filing
A bankruptcy attorney is the best person to review your property, concerns, and applicable bankruptcy exemptions. They can help you:
- Understand the value of your car
- Look at real estate or wildcard exemption laws in your state
- Understand the bankruptcy code
- Consider Chapter 13 bankruptcy instead of Chapter 7
- Consider repayment plans based on your monthly income, monthly payments, and your car's equity.