April 24, 2020
Your motor vehicle can oftentimes be the only thing that can efficiently get you to work, to school, to the store, to take care of others, and to help accomplish other essential tasks. When bankruptcy becomes the only option to help keep you and your family afloat during financial tribulations, you need to know what property is exempt from repossession. That’s why it can be particularly nerve-wracking to know if you can keep your car in a Chapter 7 bankruptcy filing.
How Much Do You Owe on Your Car?
One of the main qualifiers that decide whether or not you can keep your car is the amount you owe on it. Typically, when courts are deciding what property can be sold to creditors, there is a specific process they follow.
The equity in your car is simply determined by the value of the car less the car loan. If the amount that you owe is not enough to cover the equity value of your car, then creditors have the potential to repossess and sell it. Simply put, the value of the car cannot exceed the amount you owe when you file.
If all of the equity value of your car is protected through the motor vehicle exemptions of Virginia, then you can keep your vehicle. This means that your car’s market value is exempt to creditors.
What Is Protected Under Virginia Law?
Under Virginia bankruptcy law, there are a number of properties that are exempt from repossession or resale by creditors and lenders. The most common examples of property exemptions for bankruptcy in the state of Virginia include the following:
- Cemeteries and burial funds
- Claims for personal injury and wrongful death actions
- Health savings account
- Homestead or residential property
- Insurance benefits
- Motor vehicles (up to $6,000 in equity)
- Pension and retirement benefits (provided they are ERISA qualified)
- Household goods and furnishings (up to $5,000)Firearms (up to $3,000)
When it comes to motor vehicles, Virginia gives filers $6,000 in equity to protect their cars.
For example, if you own a car that is worth $5,000.00 and there is no loan on the car, you have $5,000 in equity. The bankruptcy exemption of $6,000 is more than enough to protect your car and you will keep your car.
If your car is worth $5,000 and you owe more than $5,000, then you have no equity in the car so it is of no value to the bankruptcy trustee and they will abandon their interest in your car. Even if the equity in your vehicle is more than $6,000, you will most likely keep your vehicle. This is because you will be able to use part of what is called the Homestead Exemptions (does not have anything to do with a home) up to $5,000. As long as the equity in your car is not much more than $11,000 you will most likely be able to keep your car.
What Happens If I Have a Car Loan?
If you have a loan on your car when you are filing for bankruptcy, there are a few steps you can take. With nonexempt equity on the car exceeding the exempt, you can:
- Surrender the car
- Reaffirm the debt
- Redeem the car
Surrendering the car
This is an option for debtors that wipes clean all of their car debt. When you surrender your vehicle under a Chapter 7 filing, you won’t owe any more payments on the car. If there remains a deficiency (amount still owed after the lender sells the car) you will not owe any of that deficiency amount.
Reaffirming the debt
When a car loan is taken out, the car is pledged as collateral. This makes the loan a secured debt, meaning it can be used to pay off that specific creditor to who the debt is owed. When you reaffirm your debt to keep the car, you continue making payments on it, remaining liable on the debt.
These loan payments will continue through and after the bankruptcy process until it is paid off. This allows you to keep your vehicle as you go through Chapter 7 bankruptcy in Virginia.
There are additional steps that the bankruptcy attorneys at Cravens & Noll can take so that you can keep your car so long as you keep it insured and make timely payments, without actually reaffirming the debt. The bankruptcy judge enters an order allowing you to keep the vehicle, keep it insured and keep making payments, but you are not obligated on the loan if you in the future default on the car loan.
Redeeming the car
You can keep your car by redeeming it during a bankruptcy filing. This means that, as the debtor, you pay your lender/creditor the current market value of your car to clear the remaining debts you owe. For example, if your car is worth $5,000 and you owe $8,000, you can pay a lump sum of $5,000 to the lender to redeem the car, and the $5,000 car is exempt based on the car exemption of $6,000.
With that said, there are lending companies that specialize in redemption cases. Sometimes, the debtor winds up paying much less for the car by using a redemption company rather than trying to reaffirm the existing debt.
If you and your creditor cannot agree on the current market value of the car and how much has to be paid to redeem the car, the bankruptcy court will decide how to proceed.
How to Avoid Losing my Car
While nothing can be guaranteed in a Chapter 7 bankruptcy filing, the best way to ensure you have done everything possible to keep your car is to consult with an experienced lawyer. The lawyers at Cravens & Noll Bankruptcy Law Group have years of experience in protecting you and your property.
Are you concerned about losing your car while filing? Contact us now for your initial bankruptcy consultation.