Can I Keep My Car in a Chapter 7 Bankruptcy?
One of the biggest concerns that people have before filing for bankruptcy is whether the court or some other party will take all of their stuff, and leave them out on the streets with nothing. Fortunately, this is not true. The Bankruptcy laws are designed to leave you with a certain level of property (although with limits) so that you can continue to contribute to society. So, the question many people ask Is: can I keep my car in a chapter 7 bankruptcy?
Traditional Chapter 7 Bankruptcy Beliefs
As mentioned above, one traditional notion concerning filing for chapter 7 bankruptcy is that you’re left with nothing – no money, no house, no cars and no belongings. ALERT: This belief about chapter 7 bankruptcy is inaccurate! The Bankruptcy laws were designed to try and find a balance between giving a debtors a financial fresh start and giving creditors an opportunity to collect debts owed to them. To avoid debtors becoming public charges, the Bankruptcy laws provides for property that a debtor may keep when filing for chapter 7 bankruptcy. In bankruptcy terms, these “property protection laws” are referred to as exemptions.
The Chapter 7 Bankruptcy Estate
To better understand how an exemption in bankruptcy works, we have to take a step back. When a person files for bankruptcy, a trustee is assigned to their case. All of the interests in any kind of property that the debtor owns – houses, cars, clothing, bank accounts, lawsuits, websites, collectibles, insurance policies, etc. – all become property of this hypothetical estate of the debtor that is managed by the trustee. At the time of filing a chapter 7 bankruptcy case, then, all of that property, in theory, belongs to the trustee. When you claim an exemption in the case, you are, in effect, declaring that the law protects that property, and pulling that property out of the hypothetical bankruptcy estate.
There are bankruptcy exemptions that are based on federal law, as well as bankruptcy exemptions based on state law. Both sets, however, mirror each other substantially, and exempt similar kinds of property. A vehicle is one of these items that is may be exempted under either set of laws.
The law provides that a person filing for bankruptcy, chapter 7 or otherwise, may exempt the available equity in a car, and provide limits on what that equity is. For instance, the current exemption in New York for a motor vehicle is $4,550.00. What does this mean for you?
Example 1: If you own the car outright, we have to analyze it’s market value. If the car’s market value is $4,550 or less, you’re good – you can claim the exemption and keep your car with no issue.
Example 2: If you own the car outright, and it’s market value is $10,000, there is $5,450.00 in non-exempt equity ($10,000 market value minus $4,550 exemption = $5,450 non-exempt equity). Thus, in this case, if you want to keep the car, you have to pay the trustee $5,450, or you can surrender the car to the trustee who will sell and pay you the first $4,550 from the sale.
Example 3: If you finance a car, we have to work with the finance company to keep the car. Similar to Example 2, you have to find out if any equity exists in the car by comparing the car’s market value to the amount owed on the loan. If there’s equity, then apply the exemption. If there’s no equity available, then no need to worry about the exemption.
Example 4: What if you are leasing a car and file for chapter 7 bankruptcy? It’s a little of a trick question. A lease is a contract, but does not give you an ownership interest in the car. You will have to do other things when it comes to a lease, but the exemption issue doesn’t apply. If you want to keep a lease going, you will “assume” the lease. If you want to surrender a leased car and have any debt discharged, you will “reject” the lease.
Ultimately, the goal is to give a debtor the means to continue transportation to live his or her life – traveling to work, school and other household necessities. While there is widespread misinformation that you lose everything in bankruptcy, this simply isn’t true. You can keep quite a bit of property, including a car. The analysis begins with your vehicle’s market value and ownership status. In many instances, you can file for chapter 7 bankruptcy and keep your car.
If you would like to learn more about how filing for chapter 7 bankruptcy can help you, whether it’s keeping your car or stopping a foreclosure or garnishment, contact the Law Office of Richard Kistnen today, (718) 738-2324, or email [email protected]