Saving Your Car in Bankruptcy
When you file bankruptcy, it is also important to compile a list of property that is “exempt.” An exemption allows you to keep certain belongings even though you are declaring bankruptcy. The way your property will be handled is different in a chapter 7 and a chapter 13 bankruptcy. For example, chapter 7 allows you to write off many of your debts, but also requires you to give up some of your belongings so that they can be sold to pay off your creditors. In chapter 13, the value of your property adds to the amount that you need to pay per month. Basically, this is because you could essentially sell your belongings and use the equity to pay off other debts.
Because it is universally recognized that people need certain pieces of their property in order to survive, some of your belongings, including vehicles, can be exempt from bankruptcy. Vehicle exemptions can be given when you own your car outright, or when you are current with your car payments.
How Much Equity Do You Have?
When you declare your exemptions in a bankruptcy case, you are only doing so for the amount of equity that you have in each item. If you own your vehicle free and clear, the amount of equity that you have is equal to the fair market value of the car – regardless of how much you paid for it initially. If you make payments on the car, the equity that you have in the car is equal to the amount of the car that you actually own. For example, if your car is worth $12,000 but you only owe $10,000 on the car, you have $2,000 of equity. By finding out the amount of equity that you have in your car, you take the first step to ensure that it is declared exempt.
Is Your Equity Exempt?
The trickiest part of the whole scenario is that federal law only allows you to have a vehicle exemption of a set number of dollars. If the amount of equity that you have in the car is more than the vehicle exemption limit, you are only protected up to that limit. For example, if your vehicle is worth $500 more than the limit, a chapter 7 bankruptcy would require that you pay $500 to the bankruptcy trustee in order to keep your car. In a chapter 13 bankruptcy, the $500 would be added to your monthly plan payments if you wanted to keep the car.
What Should You Do?
It is possible to declare bankruptcy and still keep your car. To find out whether your car is exempt, contact California Bankruptcy Relief at 888-748-0025.
