A bankruptcy exemption means you're free from liability. When you file for Chapter 7 bankruptcy, there are processes in place that allow you to protect your car – if it meets exemption requirements.
What Is a Bankruptcy Exemption?
In a Chapter 7 bankruptcy, any property you own that can't be covered with an exemption can be liquidated by your trustee in order to repay your debts, and this could include your vehicle. However, an exemption in bankruptcy allows you to protect a certain amount of your assets, which you can keep without liability.
There are many types of exemptions which can protect many types of personal property, such as your car, your primary residence, professional tools, or furniture. These are protected up to a certain dollar amount; sometimes, the entire value of an item can be kept safe with an exemption.
Exemptions are designed to leave you some money to make a fresh start. The specific exemptions, their amounts, and what they protect vary by state. There's also a federal exemption limit that can be used in some states, though not all states allow you the choice to use it.
Exemptions to Keep Your Car in Chapter 7 Bankruptcy
There are many items that can be saved from liquidation in a Chapter 7 bankruptcy through the use of exemptions. The amount and type of property you can keep can vary depending on your situation. Exemptions work in a few different ways when it comes to keeping your vehicle through bankruptcy.
You can usually keep your car if its equity can be protected under a motor vehicle exemption, or a wildcard exemption. These are two different things, and their amounts vary by state. You can combine your wildcard and car exemptions to cover more equity if needed, though.
Let's take a look at how these work:
State Motor Vehicle Exemptions
Motor vehicle exemptions are mainly used to cover the amount of value in an inexpensive car, but they can also be used for motorcycles and other vehicles if they're your primary mode of transportation.
For example, let’s say your car is worth $5,000 and your state only allows you to protect $3,725 worth of equity. In this situation, your motor vehicle exemption doesn't cover your car's value completely, so your trustee could sell it. If this happens, they use the $1,275 that wasn't covered by exemption to repay some of your debt.
Wondering why they're not using all $5,000 of value to repay your debt? The amount of money that would have been exempt comes back to you, and you can use that to purchase an affordable vehicle to get you around. Sometimes, though, if the profit from the sale of your car would result in more work and fees than value that can be recovered, your trustee may choose not to sell it.
Wildcard exemptions can be used to protect any type of property you choose. The beauty of the wildcard is that you can break up the available exemption amount to add to exemptions that aren't quite covered.
For example, say your vehicle is only worth $4,000 and your state only allows you to protect $3,725 worth of equity. In this situation, your motor vehicle exemption doesn't cover your car's value completely, so your trustee could sell it.
This isn't likely to happen, though, due to only having $275 in nonexempt value. However, if you also have a $500 wildcard exemption, you could use part of it to fully protect your vehicle.
Federal exemption limits are revised every three years, and the current federal exemption limit is $4,000 (established April 2019). This can only be used if you're given the choice to – not all states allow you to. Some states don't carry a motor vehicle exemption, so choosing the federal exemption could allow you to protect more of your property in these cases.
You can't cherry-pick which property gets which exemption, though. If you live in a state that doesn't have a vehicle exemption, but has a large homestead exemption amount, you may need to weigh your options carefully before making your choice, depending on your situation.
Remember, too, that you have to make these selections when you file, and they can't be switched later on. It's a good idea to talk to a bankruptcy attorney, or your local legal aid office, before filing your Chapter 7 paperwork.
What if I Can't Exempt My Vehicle?
If you still have an auto loan on your car, and it can be covered with an exemption, you have to prove that you can continue to pay for the loan throughout the bankruptcy. There are typically two options for auto loans during Chapter 7 bankruptcy:
- Reaffirm your loan – You and your lender must agree that you can and will continue to keep up with the loan payments as agreed. This means you're not including your vehicle in the bankruptcy. However, one late or missed payment during or after your bankruptcy results in the loss of your car. One bonus to a reaffirmation agreement with your lender is that you may be able to negotiate different rates and terms on your loan to make it more affordable.
- Redeem your loan – If you can pay your lender the entire fair market value of your vehicle in one lump sum, you can purchase it outright. If you do this though, you need to make sure that you can exempt its value or your trustee could turn around and sell it.
Getting Another Car During Bankruptcy
If you're unable to exempt the value of your car, and redemption and reaffirmation don't protect your vehicle, you can still qualify to get another auto loan during bankruptcy. You just have to be working with the right type of lender.
Bankruptcy car loans can be found through special finance dealerships that are signed up with subprime lenders. These lenders have the resources to assist people in many unique credit situations, including personal bankruptcy.
If you need to find an auto loan now, start right here at The Car Connection. We have cultivated a nationwide network of dealers that have the bankruptcy lenders you need. Simply fill out our free car loan request form to get started now!