If I file bankruptcy, can I keep the car?
A frequent question that people have is what will become of their personal property when they file for bankruptcy, in particular, they want to know what will happen to their vehicle. Every situation is different and will need to be analyzed individually by an attorney, but I can provide a general answer to this question to increase an understanding of how the topic is treated.
First off, it depends on which type of bankruptcy you are filing. In a Chapter 13, you don’t lose any personal property that you want to keep, provided that you can pay for any non-exempt equity in the vehicle through the life of the Chapter 13 plan. If that sounds confusing, it’s because Chapter 13s can be very confusing, and you should definitely speak directly to an experienced bankruptcy attorney before coming to any conclusions about your property in a Chapter 13. Relatively speaking a Chapter 7 bankruptcy is much simpler.
In a Chapter 7, you can keep all of your property so long as it is protected by an exemption. Although there are many helpful exemptions under Nebraska law, there is no exemption for an automobile. However, there is a “tool of the trade” exemption in the amount of $2,400 for each individual. If you use a vehicle to get to or from work, or to search for work, case law dictates that you may use this exemption to protect that amount of equity in your vehicle. You don’t need to have an hour long commute from Lincoln to Omaha, any reasonable distance will do to take advantage of this exemption.
“Equity” in this case doesn’t exactly mean how much the vehicle is worth, it means how much of the worth of the vehicle that you actually own. Sometimes people think if they pay off their car and file bankruptcy, then the vehicle will be protected. The opposite is true. It is far more helpful to still owe money on the vehicle when you file for bankruptcy, because the amount owed reduces your equity. Additionally, sometimes people think that if they file for bankruptcy on a vehicle that they are still making payments on, then they can keep the vehicle and stop making payments. This is not the case.
To keep the vehicle, you will need to be current on your loan at the time of filing the bankruptcy and you will need to stay current afterwards. If you miss any payments after filing, then the creditor can seize and resell your vehicle, but the bankruptcy prevents them from suing you for the deficiency. This assumes that you have not signed a reaffirmation agreement, which I will discuss in a later blog posting.
To illustrate, let’s assume that your vehicle has a resale value of $10,000. You owe your lender $8,000. If you use this vehicle to get to work, then the “tools of the trade” exemption will protect the vehicle because your equity is under $2,400. But let’s assume that you don’t use the car to get to and from work. Let’s assume you only use the vehicle to drive to Husker games. You cannot use the exemption to protect the vehicle, and the Trustee can take an interest in it. However, this does not necessarily mean that you will lose the vehicle. You may be able to work out a deal with the Trustee that will permit you to pay the Trustee $2,000 (your equity in the vehicle) over X number of months. But really, if your using the car just for Husker games, it’s a better idea to let it go and start fresh!