Can I Keep My Car If I File Chapter 7?
November 9th, 2018 by Bunch & Brock
If you are thinking about filing for Chapter 7 bankruptcy relief, you probably know this involves “liquidation,” or selling of property, to pay back debts. This is naturally worrying, especially when it comes to the property you need, such as a vehicle you use for transportation. Many pre-bankruptcy clients wonder, “Can I keep my car if I file Chapter 7?” The answer is: there is a good chance you can keep your vehicle post-bankruptcy.
If there is a loan against your car, the lender has the right to repossess it for lack of payment. The first benefit of Chapter 7 is this: filing for bankruptcy immediately stops the lender from repossessing your vehicle. This benefit is temporary, but the company cannot repossess the car until the case is discharged or a judge orders immediate repossession.
Auto Loans and Chapter 7 Bankruptcy
If you own a paid-for used car, you may be able to save it with qualified Chapter 7 bankruptcy exemptions. (More on that below.) Since many people don’t own their car outright, the loan against your vehicle becomes an important factor in your case. Whether you ultimately keep your car depends upon the value of the car, your payment history, and negotiable factors.
When you file for Chapter 7, the following becomes true regarding your vehicle:
- You can potentially modify your loan agreement to reduce payments or improve terms – You may be able to negotiate for reduced payments based upon the car’s actual value.
- You can negotiate to recover a repossessed vehicle – If you have already lost your car, you may be able to get it back. This may entail paying the loan off, but you can also negotiate for a lower “current value” payment.
If you are current on your auto loan payments when you file for bankruptcy, you can usually enter into a reaffirmation agreement to continue paying on the loan. This agreement can be negotiated to provide for more favorable terms, such as lower payments. If you are behind on your vehicle payments, you can still potentially save your car with a negotiated affirmation agreement.
Alternatively, you can seek what is called a “722 redemption,” which reduces your loan balance based on the current market value of your vehicle. Since newer cars depreciate substantially over time, you may be able to get a much better deal this way. Options include paying off the loan in a (reduced) lump sum or seeking a new loan under 722 redemption terms.
To enter into a loan modification agreement, you will need legal documentation signed by a judge. Before making any decisions about bankruptcy, it is important to seek help from a qualified bankruptcy attorney.
Chapter 7 Exemptions
In Chapter 7 bankruptcy, the debtor is required to relinquish items that qualify as “non-exempt,” but several items are potentially exempt (including wardrobe, household furnishings, and work-related tools). A set amount of equity in a motor vehicle is always exempt from the liquidation process.
In Kentucky, Chapter 7 filers have a choice to take advantage of federal or state property exemption rules. Whichever you choose, you must apply the exemptions to your whole case, not just on your car. Currently, the vehicle equity exemption is:
- Federal: $3,775
- Kentucky: Up to $2,500 in a single vehicle, including accessories and spare tire.
In addition to the vehicle exemption, there is a “wildcard exemption” that can be applied toward a car or truck. The federal wildcard exemption is $1,250 and Kentucky’s wildcard is $1,000.
It is important to note: married couples filing for joint bankruptcy can double their exemptions. So, if married and filing jointly, potential exemption amounts, including the wildcard, would rise to $10,050 federal or $7,000 state for a single car.
The longer you wait to explore your bankruptcy options, the more stress and worry you will endure. Contact Bunch & Brock to learn about your options for a fresh financial future.