Will I Lose My Car If I File for Bankruptcy?

One of the biggest misconceptions about bankruptcy is that filing automatically means losing your car.

For most people, that simply is not true.

In many bankruptcy cases, the more important questions are: How much equity do you have in the car? Are you current on the payments? And do you want to keep it?

TL;DR

• Filing bankruptcy does not automatically mean losing your car.

• Massachusetts law provides an exemption that can protect up to $7,500 in qualifying vehicle value, with additional exemptions potentially available.

• If you owe more on the car than it is worth, a Chapter 7 trustee will generally have little economic reason to sell it.

• If you are behind on payments or have substantial unprotected equity, Chapter 13 may provide another way to keep the vehicle.

• Even if a vehicle has already been repossessed, bankruptcy may sometimes help if the vehicle has not yet been sold.

A Car Loan Can Actually Mean Less Equity

Bankruptcy trustees are generally interested in property that can be sold to generate money for creditors.

That is why a car with a large loan against it may present less of an issue than a car that is completely paid off.

For example, if your vehicle is worth $20,000 but you owe $19,000 on the loan, there is only about $1,000 in equity. If you owe more than the vehicle is worth, there may be no equity at all.

This does not mean you should hide or leave a vehicle off your bankruptcy paperwork. Everything must be disclosed. The point is simply that owing money on a vehicle does not automatically cause you to lose it.

Massachusetts Gives Debtors a Vehicle Exemption

Under Massachusetts law, a debtor may exempt up to $7,500 in a qualifying automobile used for personal transportation or to secure or maintain employment. Massachusetts also provides a wildcard exemption of up to $1,000, plus as much as $5,000 of certain unused exemptions. Depending on the circumstances, those exemptions can provide additional protection for vehicle equity.

For many of our bankruptcy clients, the basic vehicle exemption alone is enough to protect the equity in their car.

What If You Have Too Much Equity?

Suppose your car is paid off and worth considerably more than the exemptions available to you.

That does not necessarily mean someone immediately comes and takes the car.

The amount of unprotected equity, the costs involved in selling the vehicle, the exemptions available, and the particular facts of the case all matter. In some Chapter 7 cases, it may also be possible to reach an arrangement concerning nonexempt equity.

If the equity is simply too large to protect comfortably in Chapter 7, Chapter 13 may be another option.

What If You Are Behind on Your Car Payments?

This is a different issue.

A Chapter 7 bankruptcy generally does not give you the right to keep a financed vehicle indefinitely while failing to make the required payments. The lender has a security interest in the vehicle.

Chapter 13, however, can allow certain defaults to be addressed through a repayment plan. Depending on the circumstances, a debtor may be able to deal with past-due amounts and protect equity while making payments through a three-to-five-year Chapter 13 plan.

The exact treatment of a car loan depends on the loan, when the vehicle was purchased, the amount owed, the value of the vehicle, and other bankruptcy rules.

What If the Car Has Already Been Repossessed?

Even repossession does not always mean it is too late.

Massachusetts law gives borrowers certain redemption rights before a repossessed vehicle is disposed of. Bankruptcy may sometimes provide a way to recover and keep a repossessed vehicle if action is taken before the lender completes the sale or otherwise disposes of the vehicle.

Once the vehicle has been sold, however, the options become much more limited.

You Do Not Automatically Lose Your Car in Bankruptcy

For most people who come into our office, surrendering a vehicle in bankruptcy is a choice, usually because the loan is too expensive or the vehicle is worth substantially less than what is owed.

Losing a vehicle to a bankruptcy trustee is much less common.

The important thing is to determine the vehicle’s value, the loan balance, available exemptions, whether payments are current, and which chapter of bankruptcy makes the most sense before making major financial decisions such as paying off a car loan.

If debt has become difficult to manage and you are worried about what bankruptcy could mean for your car, call or text the Law Office of Louis S. Haskell at 978-459-8359 to schedule a consultation.