One of the common reasons that people have for putting off filing for Chapter 7 bankruptcy even though it is their only choice in their given financial situation, is that they want to keep their car. Most even go so far as to say that they NEED to keep their car. Some would argue this point, but I can understand the fear of not having a stable, dependable vehicle to get you where you need to go. In some instances it’s the only mode of transportation available to get to and from work. In other instances, it could be necessary in order to transport family members to and from frequent medical treatments or therapies. Whatever the reason, what’s going to happen to the car is a major factor in many decisions to file or not to file.
When you file bankruptcy, can you keep your car? When you own a car and file for Chapter 7 bankruptcy, what happens to your car will depend on whether or not you owe money on the vehicle. If you do not owe money on the car, you may be required to pay to keep it unless the full value of the vehicle can be exempted. First determine how much your vehicle is worth. When determining the worth of your vehicle for the purposes of bankruptcy proceedings, the “worth” is how much you could sell it for with its age and condition taken into consideration in the current market. This is often referred to as the “replacement” or “market” value.
Common resources used to determine this number are Kelley Blue Book or National Auto Dealers Association. Once you determine what the car is worth, you can determine how much equity you have in the car. For example, if the car is worth $3,400 and you don’t owe any money on the car, your equity is $3,400. If the car is worth $3,400 and you owe $1,000, your equity is $2,400. If you still owe money on the car, the equity is how much the car is worth minus the amount still owed on the auto loan. If the car is worth $3,400 and you owe $3,400 then you have zero equity.
Next you compare your equity to the exemption amount allowed by the bankruptcy court. Depending on which state you live in, the exemption amount will vary. In California, there are two sets of exemptions that can be used: System 2 and System 2. Petitioners choose which system is best for their situation. In California Exemption System 1, filers can exempt up to $2,900 of equity in their car. In California Exemption System 2, filers can exempt up to $5,100 equity in their car. If a California bankruptcy filer uses California Exemption System 2 and their vehicle is worth more than $5,100, they may be able to protect their extra equity through the wildcard exemption that allows up to $28,000 in additional property exemptions. Unused portions of the homestead or burial plot exemption allowances can also be applied to other property like a car.
If you do owe money on the vehicle the question becomes, can you afford to keep it?
When you file bankruptcy, can you have the payments of the auto loan lowered so you can afford the payment and keep the car? If you have a car loan and you are behind on your payments, the lender can take back your vehicle even if an exemption protects the amount of equity in the car. You have two options: to redeem the car or reaffirm the car loan. Redeem the car means to pay the market value of the car to the lender in one lump sum. To reaffirm the car loan means to sign a new loan that you will still be liable for once the bankruptcy is complete and the discharge of debt is received. When reaffirming the vehicle loan, you’ll be required to make up the past due payments in the new agreement. The lender is NOT, however, required to agree to any modifications to the loan either way (including payment amount).
To learn more about equity exemptions and filing Chapter 7 bankruptcy in California, please get in touch with one of the experience southern California bankruptcy attorneys at Westgate Law.