Choosing to file for bankruptcy isn’t a decision you make lightly. However, if you are deep in debt and can’t seem to find a way to pay it off, this option serves as a last resort to reset your finances. If you have a car, keeping it might be one of your top concerns, so will filing for Chapter 13 bankruptcy let you keep your car?
What Happens to Your Car When You File For Bankruptcy?
In most bankruptcy cases, you either file for Chapter 7 or Chapter 13 bankruptcy. Whether you can keep your car will depend on the type of bankruptcy you file, what exemptions apply where you live, the value of your car, and whether you own, lease, or are still financing your car. Your car is considered a valuable asset, so it’s not surprising that creditors may look to sell it to settle your debt.
When filing for Chapter 13 bankruptcy, your debt is grouped into three categories:
- Secured debts – if you have a car loan, it is included in this category. If your car loan balance is higher than your car’s current value, chapter 13 can reduce your debt.
- Priority debts – these are the debts that must be repaid in full such as bankruptcy costs, tax arrears, child and spousal support, etc.
- Unsecured debts – these are discharged in the bankruptcy filing after you have completed your payment plan.
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Chapter 13 offers benefits that can help you keep your car, such as not liquidating all your assets so you don’t lose everything. It allows you to stop a repossession, catch up on your car payments, reduce your car loan and even give your car to the bank (lender) if you can’t make the payments on your car or if it needs costly repairs. That said, while surrendering your vehicle back to the lender saves you from making these payments, it has credit consequences.
According to the Bankruptcy Code, each state has bankruptcy exemption laws that explain what people filing for bankruptcy can keep. These exemptions allow you to retain some of your property, but your creditors can get any non-exempt property you can’t protect. In both bankruptcy cases, your creditors receive the funds differently.
In Chapter 7, the bankruptcy trustee on your case sells your non-exempt property then distributes the money to your creditors. In Chapter 13, you can keep your non-exempt property, but you will pay the value of this property in your payment plan. Your bankruptcy trustee disperses these payments to your creditors.
Here’s an example to make things clear.
Exempt car – If the car exemption in your state is $8000 of your car equity and your car is worth $8000 or less, you can keep the car under state exemption laws both in Chapter 7, and it won’t affect your Chapter 13 payment plan. This means you won’t pay to keep your car.
Non-exempt car in Chapter 7 – Suppose you own a car worth $30000, but your state’s car exemption limits you to $10000 of equity. Your Chapter 7 trustee will sell the car, give you the $10000 exemption amount, deduct sales costs and their fees, then share the rest among your creditors. Assuming expenses account for 20%, your creditors would receive $14000
Non-exempt car in Chapter 13 – following the same example, in Chapter 13, your trustee wouldn’t sell your $30000 car, but you are not off the hook. You would have to pay the $14000 owed to your creditors through the payment plan.
What To Do To Keep Your Car In Chapter 13
- Prove you can afford it
To keep your car in Chapter 13, you have to show that you can afford to make the monthly payments to your creditors. But it can get costly, especially if you retain a lot of non-exempt property. In addition to paying your monthly expenses, you will need to pay the greater between your monthly disposable income or the value of the non-exempt property you want to keep that is not exempt. These payments are made through a 3 to 5-year repayment plan toward your unsecured debt, such as paying off your credit cards. If a creditor feels they are not getting the amount owed, they can object to your payment plan.
- Pay for excessive car equity
You can exempt any property, including your car in bankruptcy, but you must pay for any non-exempt assets you choose to keep. Since you must pay your unsecured creditors an amount equal to the value of your non-exempt property, retaining a lot of non-exempt car equity can prolong your payment plan.
That said, you can cram down or reduce the principal balance and consequently the interest rates on your car loan. If you are eligible as per conditions set by the state, you can reduce your balance to the car’s fair market value. The court can discharge the balance after paying the lender an amount equivalent to your car’s value.
There’s a catch, you need to have taken the loan more than 910 days before filing for bankruptcy, and you must pay the cramdown amount in full through your repayment plan.
- Prove your car expenses are reasonable
Your Chapter 13 payment plan needs to show how your disposable income is used to repay your unsecured debts. Your disposable income includes all the money you have leftover after deducting living expenses necessary to support you and your dependents.
Since your creditors need to be paid as much as possible to clear your debt, there is a chance they will object if it seems you are using your income for non-essential items. For instance, making high car payments or paying for a second car you don’t need.
The bankruptcy court might decide that making high car payments for an expensive luxury vehicle is not a reasonable expense, nor is having two cars. As such, you might not be allowed to include the car payment in your plan. Instead, you would only be able to claim an expense consistent with a lower-priced car.
That said, sometimes keeping the car in Chapter 13 is not feasible. For instance, if you have a lot of non-exempt car equity, your car payment is very high, or you are making payments for a second car you don’t need. Consider letting your trustee sell your car and pay off your debts in such a case.
Wondering Where To Start?
Filing for Chapter 13 bankruptcy is expensive, and not everyone can afford to make the monthly payments. However, if you are determined to keep your car, contact a bankruptcy attorney and the legal team at Van Horn Law Group.
Call and find out how to can keep your car.