Most Americans consider their vehicle to be only slightly less important to them than food, clothing and shelter..and for some experiencing especially tough times, their vehicle IS their shelter. And as a practical matter, having transportation to work is essential for debtors fortunate enough to retain their jobs, especially those who file under Chapter 13 and need that income stream to fund their recovery plan.
So what happens to motor vehicles under the Bankruptcy Code?
If you own your vehicle outright and there is no debt secured by it (i.e. you own it “free and clear”), the Code allows you to exempt (retain) up to $3,500 worth of equity in it even though some or all of your debts are discharged. In addition, you can “piggy-back” any unused “wild card” exemption to protect the vehicle’s value in excess of $3,500. Example: you own a car worth $5,000 and you’ve already paid off your car loan. If you file for bankruptcy, you can use your $3,500 vehicle exemption plus $1,500 of your “wild card” exemption and keep the vehicle as your own, free and clear of any claims of your creditors or the Court.
If you are in the more-common situation of owing money on your car and making monthly payments on the loan, you have three basic options:
- Surrender the car to the lienholder and get the loan discharged in bankruptcy, and find other means of transportation (i.e. buy a different car). This can be the best option if the car has significant problems and/or is worth less than you owe on it, AND you can find other means of transportation; or
- Redeem the vehicle by paying the lienholder its actual fair market value in a lump sum, after which the amount you owe in excess of the fair market value is discharged in the bankruptcy. This can be the best option if the vehicle is reliable and you want to keep it, but you owe a lot more than its fair market value, AND you have sufficient funds from some other source to pay its fair market value in one lump sum; or
- Reaffirm the car loan and continue making payments as you have, and retain the vehicle. This can be the best option if your loan payoff is about the same as its fair market value and the vehicle is reliable enough that you want to keep it, AND you are current (or nearly current) on the loan, AND you can afford the monthly payments going forward.
The basic premise of the Bankruptcy Code is to allow honest debtors a financial “fresh start.” Allowing a debtor to keep a vehicle of reasonable value is part of that fresh start. Most debtors who need to have a vehicle can find a way to keep one by exempting their paid-off vehicle or reaffirming their car loan and continuing to make the car payments as if there had been no bankruptcy. If you or someone you know is worried about losing their vehicle because they are behind on their car payments or otherwise in financial distress, call our firm for a free consultation, or visit www.defendmyrightsnow.com/bankruptcy.html to learn more.