Compare Your Car Equity to the Applicable Motor Vehicle Exemption
Each state has a set of exemptions that can be used in bankruptcy. Most states allow bankruptcy filers to protect some equity in a car or other motor vehicle. The amounts vary widely, however. Some states allow bankruptcy filers to use the federal bankruptcy exemptions instead of the state exemptions. The federal bankruptcy exemptions allow you to exempt up to $3,675 of equity in your car.
Once you find the applicable motor vehicle exemption in your case, compare it to your equity. If the exemption covers all of your equity, the trustee cannot sell your car. If you have lots of unprotected equity, the trustee is likely to sell your car (although you may be able to keep your car by paying the trustee the nonexempt amount). If a small amount of equity is nonexempt, you still may be able to keep your car.
Here’s an example of how this works.
Example. Joe lives in Arizona. He owns a 2007 Toyota Corolla worth $7,000. He still owes $5,000 on his car note. Arizona allows debtors to exempt up to $5,000 in equity. The trustee cannot sell Joe’s car in Chapter 7 bankruptcy because the $5,000 motor vehicle exemption is enough to protect all of his car equity (car equity is $7,000 – $5,000 = $2,000).
Will the Trustee “Abandon” Your Car?
If the equity in your car is over the exemption amount, but not by much, you still may be able to keep your car. Here’s why.
In order to use the car equity to repay your creditors, the bankruptcy trustee must sell the car at auction. The trustee will also earn a commission from the sale of the car. From the sale proceeds the trustee must: (1) pay off the car loan; (2) pay you the amount of your exemption; (3) deduct the costs of sale, and (4) deduct the trustee’s commission.
If, after all of these costs and deductions there is little or nothing left over for your unsecured creditors, the trustee is unlikely to sell the car. In this situation, the trustee will “abandon” the car, which means you get to keep it.
If Your Car Is Exempt: Further Steps to Keep Your Car
If you determine that the trustee will not sell your car to pay your creditors, you still have one more step to take if you have a car loan (if you don’t have a loan, you are done). Even though the car is protected from the trustee, the lender can still repossess the car unless you continue to make your car payments and either (1) redeem the car (pay the market value of the car to the lender) or (2) reaffirm the car loan (sign a new loan that will remain in force after the bankruptcy is over).
We will discuss more on this topic in the next blog…..
Carolyn Secor… is a Clearwater bankruptcy attorney and Clearwater foreclosure attorney serving Palm Harbor, New Port Richey, Oldsmar, Tarpon Springs, Seminole, St. Petersburg, and the Tampa Bay area.