tend to hear the same question very often: “Can I keep my car if I file a bankruptcy case?” Typically, the answer is yes. If you have $10,000 in credit card debt and you own a Ferrari, free and clear, the analysis changes but, in most cases, keeping the vehicle is possible.
Keeping a Vehicle in a Chapter 7 Bankruptcy Case
In Chapter 7, or “liquidation bankruptcy,” a debtor can typically keep at least one vehicle. While exemptions vary by state, the Federal Exemptions, which are available to debtors in Pennsylvania, allow debtors to exempt up to $3,450 of their interest in a motor vehicle (spouses filing together each get their own exemption). If you owe a loan on your vehicle, your “interest” in the vehicle is its value in excess of the amount you still owe. For example, if you owe $7,000 on a vehicle that is worth $10,000, your “interest” in the vehicle is $3,000 which would make it fully exemptible under the vehicle exemption. If your interest in your car is worth more than $3,450, you can also apply a “wildcard” exemption to cover the difference. The wildcard exemption can be applied to any interest in property. The value of the wildcard exemption varies from $1,150 to $11,975, depending on how much of the “homestead exemption” debtors need to use to protect their interest in their homes.
A rule of thumb is that, if you want to keep the car in bankruptcy, you have to keep the car payment current. That rule is subject to some exceptions and variations. If you’re badly behind on your payment, you can use a Chapter 13 bankruptcy case to pay the arrearages over time. Interestingly, if you owe more on your car than it is worth, you can compel your lender to accept on the value of the vehicle. There are some important limitations to this process, so you should talk to a bankruptcy lawyer in Pittsburgh to determine whether that process might make sense for you.
Keeping a Vehicle in a Chapter 13 Bankruptcy Case
Keeping a car in a Chapter 13, or “reorganization bankruptcy” follows the same set of rules that apply in a Chapter 7 bankruptcy case except that, under Chapter 13, debtors repay their creditors some or all of what they owe them over a period of three to five years. Under Chapter 13, the exemption thresholds become less important to the “keeping the car in bankruptcy” inquiry. Your car payment will be paid through your Chapter 13 plan. The exemptions are not irrelevant in a Chapter 13 case. The reason for this is what’s known as the bankruptcy liquidation analysis. Generally, the rule for Chapter 13 cases is that, debtors must pay creditors at least as much as they would receive in a case under Chapter 7 if the debtors’ assets were liquidated. This requires bankruptcy lawyers to imagine what would happen in a hypothetical Chapter 7 case. If the vehicle is fully exempt, then there would be no sale proceeds available to pay unsecured creditors. However, if a debtor owns a $100,000 Ferrari with no car payment and has $10,000 in credit card debt, that debtor would need to pay the credit card debt in full through the Chapter 13 plan.
In practice, the most common reason for filing a Chapter 13 case is to protect a house from foreclosure. Generally, the arrearages are repaid over the plan period and the car is exempted just as it would be in a case under Chapter 7. If the debtor has a car payment, that debtor would be required to continue making that payment over the life of the plan.
Contact a Pittsburgh Bankruptcy Law Firm today to answer your questions during a free initial consultation: (412) 925-8194