Many debtors who want to file bankruptcy worry about the same issue: Can I lose my car in a Chapter 7 bankruptcy?
Most debtors incorrectly assume that their vehicles are automatically safe in a bankruptcy. Unfortunately, that is not the case. All debtors should ensure that they take the proper precautions before filing and inquire about whether they will be able to keep their car.
When filing bankruptcy, debtors are required to list all assets and property owned. One of the most commonly seized items in a Chapter 7 bankruptcy are motor vehicles. They are commonly seized due to the following reasons:
— Their values are easy to discover. Simply go online and check NADA or Kelley Blue Book
— They normally have a higher monetary value than most other personal property owned by the debtor
–They are easy to sell or auction off in a fairly expedient manner
As a result, any debtor filing bankruptcy should either consult an attorney or understand the law well enough to know whether their car will be safe.
Every state has different exemptions. Exemptions provide some protection from seizure. The majority of states have a motor vehicle exemption which protects a certain amount of the vehicle’s worth. The Georgia auto exemption is $5,000.
Thus, if a Georgia debtor owns a car worth $5,000 or less, their vehicle is safe from the trustee. If the car is worth more than a $5,000, the debtor might owe the court money if they want to keep the vehicle. Or they may have some of their wildcard exemption left (wildcard exemptions can be used to protect anything). If they do not, they will be forced to buy back the value of the car that is not exempt. Say the debtor owns a car worth $8,000 and only has $500 left of their wildcard exemption. That leaves an amount of $2,500 that is not exempt ($8,000 minus $5,000 minus $500) and must be paid back to the court. Some trustees will allow the debtor to pay back the non-exempt portion of the money over a year, which makes monthly payments much more manageable. However, some trustees may only allow three months or less to complete the buyback.
Another big question asked by the debtor is how can they pay back the court? The question can sometimes be framed in an upsetting or angry way, as most people need their vehicles to work and carpool their families. The unfortunate answer to that question is that the court does not care.
Bankruptcy is not a free ride, as many people incorrectly assume. In exchange for the debt relief being provided, debtors open themselves up to these situations. If you are caught in this situation and need your car, the best option, if possible, would be to pay the balance by using your retirement account. Some debtors borrow the money from family. Others are lucky enough to make monthly payments and are able to afford it for the short term knowing they keep their car as a result. In the end, you must weigh the value of the car to you as opposed to whether it is worth it to make payments on a car that you previously paid off. It is never easy to do that and it frustrates many debtors when the situation occurs.
Some debtors with car payments are wondering if they can lose their car too. The answer is occasionally, but loss is much less likely than when a debtor who owns a car outright. Vehicles with liens on them can still have equity and if the equity is large enough, a trustee will inquire and most likely propose a buyback agreement to recover the non-exempt equity. However, most people are even or upside down on their car loans for a good length of time in their loan timeline.
Another common question asked by debtor is what happens when they are on a car title with another person.
If the other party to the title is the spouse of the debtor, the car could still be seized (if they are filing or even if they are not filing when the spouses share debts that are in bankruptcy). Or the car might be fully exempt due to tenancy by the entirety. Every state has different wrinkles that can affect the situation.
If the co-owner is not a spouse, it depends on how the car is titled. If the car title is debtor OR co-owner, then it means both parties can sell the car at any point without needing the permission of the other party. As a result, the car will not be any more protected in the bankruptcy than if the debtor owned the car himself. If the car is titled with AND, then the debtor only owns 50% of the car and that will reduce the value of the car significantly in a bankruptcy. The debtor would then only owe half of the car’s original value, minus the exemptions. These can be very tricky situations, so it is best to consult with an experienced bankruptcy attorney and understand the situation thoroughly before filing.
The big takeaway from this article is that debtors should know the true value of their car and the exemptions they qualify for prior to filing their bankruptcy case. With that knowledge upfront, they will be in a much better position to protect themselves and their vehicles from becoming property of the bankruptcy estate.