Last updated April 24, 2017.
If you’re struggling with debt, the fate of your car is probably high on your list of concerns. You need your car to get to work, to pick up your kids from school, and to go to the grocery store. If you file for bankruptcy, will you be able to keep it?
The answer depends what type of bankruptcy you choose to file. Below, we’ll go over the differences between Chapter 7 and Chapter 13 bankruptcy and how much your car may be worth under California’s bankruptcy exemptions.
How Chapter 13 Works
Under Chapter 13 bankruptcy, you, your creditors, and the court will collaborate to work out a payment plan. The process is somewhat complicated, but you’ll generally be able to continue to make your car payments. If you have arrearages on your auto loan, you’ll be able to make those up through your plan payments, too. Chapter 13 debtors usually pay off their cars over the course of the plan.
How Chapter 7 Works
Under Chapter 7, the bankruptcy trustee will liquidate your non-exempt assets and pay the proceeds to your unsecured creditors. Here, the analysis of the fate of your car depends on two factors: whether you can afford your payments and how much your car is worth.
Can you afford your car?
When you file for bankruptcy and want to keep your car, you can choose to execute a reaffirmation agreement with your lender. In general, bankruptcy wipes out your personal obligation to pay a debt. When you sign a reaffirmation agreement, you agree to continue to be obligated for the debt. With a reaffirmation agreement, you take your car out of the bankruptcy process. You continue to make your regular payments and you keep your car.
A reaffirmation agreement is a good way to keep your car through bankruptcy, but there are other factors to consider. First, a debt that you choose to reaffirm cannot be discharged in the bankruptcy. You’re stuck with it. Second, you will have to prove to the court that keeping your vehicle is not an “undue burden.” If the court determines that making car payments will be too difficult for you, it can deny your reaffirmation agreement. They’ll look at how much money you make and what your other obligations are. If you can maintain a minimal standard of living and still make your payments, you’ll be able to keep your vehicle.
How much is your car worth?
As mentioned above, when you file for bankruptcy under Chapter 7, the bankruptcy trustee liquidates your non-exempt assets and pays the proceeds toward your unsecured debt. Property exemptions vary by state and refer to the equity you have in the property. So, if you bought a car for $7,000 but still owe $5,000, you have $2,000 of equity.
In California, you can choose between two systems of exemptions for protecting your property. Under System 1, you can exempt up to $3,050 of equity in your vehicle. Under System 2, you can exempt up to $5,350 of equity in your vehicle. You can’t mix and match the two, and California does not allow filers to use the federal bankruptcy exemptions. Note that California’s bankruptcy exemption amounts change regularly and you should ask your attorney what the correct amounts are when you file.
So, work out the amount of equity you have in your vehicle. If it’s less than the exemption amount, the trustee can’t sell it. If you have more equity than the exemption amount, the trustee may choose to sell it and give you cash for the exempt amount. If you have too much equity but still want to keep your vehicle, you have two options. You can either pay the trustee the amount by which your equity exceeds the exemption or you can reaffirm your auto loan.
The Bottom Line
If you’re filing under Chapter 13, you’ll be able to keep your car as long as you keep making your payments. Under Chapter 7, whether you keep your car will depend on your ability to make payments and the value of your vehicle. The choice of exemption system will seriously affect your Chapter 7 bankruptcy. It doesn’t just apply to your vehicle, but also to your home, insurance policies, cash, and personal property, among others. The two systems are aimed at protecting different allocations of assets.
If you’re considering filing for bankruptcy, reach out to one of our experienced bankruptcy lawyers to discuss your situation, your goals, and your options. He or she will be able to help you determine whether bankruptcy is right for you and, if it is, guide you through the complex bankruptcy process. Request a free consultation today.
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