Last updated Sept. 26, 2017.
What happens to my car if I file bankruptcy? The answer to that question depends on two major factors: what type of bankruptcy you file, and whether you own or lease your car.
This post will provide a brief review of Chapter 7 and Chapter 13 bankruptcy in Ohio, in addition to answering questions on owning, leasing, and owing money on your car and filing bankruptcy. Remember: This post is simply intended as educational. To file bankruptcy, you’ll want to consult with an experienced bankruptcy attorney who will be able to help you keep your car, in addition to other property.
What is Chapter 7 bankruptcy and how can it help me?
Although it’s referred to as a “liquidation,” most folks don’t lose any of their property in the Chapter 7 process; they shed their debts and get to start over with all their stuff. This is the case because exemption laws are in place to protect your property from the bankruptcy trustee.
In Ohio, the value of your interest in your personal vehicle is exempt up to $3,775.[i] You may also decide to apply all or part of the “wild card” exemption (which can apply to any type of property) to your vehicle. Ohio’s wild card exemption allows debtors to protect up to $1,250 in property value.
Exemptions apply to your equity in your property, not the overall property value. Your equity in property is the value of the property minus outstanding liens. For example, if your car is worth $15,000 and you have a car loan for $10,000, your equity in the car is $5,000. In a Chapter 7 case, your car is only at risk to the extent your equity exceeds the applicable exemption. In Ohio, that number is $3,775.[ii]
What is Chapter 13 bankruptcy and how can it help me?
If you file for Chapter 13 bankruptcy, or “reorganization,” you file a petition with the court to stay debt collection (meaning that creditors can take no action against you for the duration) along with a plan for repayment of your debt over the course of three to five years. You must have a regular source of income to qualify for Chapter 13 bankruptcy. If you have non-exempt equity, you can protect your valuable assets, such as your car, more easily under Chapter 13 bankruptcy than Chapter 7.
In Chapter 13 bankruptcy, the trustee doesn’t liquidate property with non-exempt equity. Instead, you pay the non-exempt value of your property as part of your repayment plan. This rule applies to cars.
If You Own Your Car and Have No Car Loan
Let’s take a look at the scenarios on if you own your car and have no outstanding car loan, what that could mean to you under the different consumer bankruptcies.
Under Chapter 7
If you own your car and have no outstanding loan, the value of your interest in your car is simply the value of your car. If your car is worth less than $3,775, it is completely exempt. If the vehicle is worth more, the trustee of your bankruptcy will determine whether liquidation is worthwhile.
For example, if your car is worth $10,000, the trustee will likely decide to sell the car. He must then pay you the cash value of your exempt interest, or $3,775, and use the balance to pay your creditors. If, however, your car is worth $4,000, the trustee will likely decide that it is not worth the time and expense necessary to sell the car and allow you to keep it.
Under Chapter 13
Chapter 13 does not involve seizure and liquidation of assets; if you own your car and have no outstanding loan, your plan payments will increase, but you will be able to keep the vehicle.
If You Own Your Car and Have an Outstanding Loan
Here are the scenarios if you own your car and have an outstanding loan on it when you file for bankruptcy.
Under Chapter 7
Here, the question is how much you owe on the car loan. If you owe $10,000 on a car that is worth $12,000, you can claim an exemption for the $2,000 of equity you have in the car.
Not sure if you’d like to keep your car? As a Chapter 7 debtor, you have several options regarding your car. First, you can reaffirm your loan. Your creditor will require you to sign a reaffirmation stating how much you owe and the terms of payment. However, you should only reaffirm your loan if you’re very confident that you can continue to make payments. If you fail to keep up with the payment schedule going forward, your finance company can repossess your car and sell it at auction. If they receive less than the value of your loan at auction (which is usually the case), you are still responsible for repaying the remainder.
Another way to keep your car is to redeem it. This may be a good option if you owe more than the car is worth, but you must pay with a lump sum, which may be difficult. To redeem your car, you must pay the fair market value of the vehicle. For example, if you own a car worth $6,000 but owe $12,000 on it, you can pay your creditor $6,000 and keep the car free of the old lien.
The third option is to simply surrender the vehicle. You will no longer have a car, but you will also no longer have a car loan to worry about. This may also be a good option if you owe more on your car than your car is worth.
Under Chapter 13
Under Chapter 13 bankruptcy, if you keep up your payments, you can keep your car. Your creditor may require you to sign a reaffirmation agreement.
If you have fallen behind on your payments, working out a payment plan with your creditor will be a part of the Chapter 13 proceedings. If you purchased your car within 30 months of filing for bankruptcy, you will owe the full value of the car. If you bought your car more than 30 months before filing, you will have to repay only the present value of the car.
So, if you own a car worth $5,000 but owe $8,000, you only have to repay $5,000. This is called a “cram down.”
If You Lease Your Car and File Bankruptcy
Finally, here is what could happen if you file bankruptcy while leasing a car.
Under Chapter 7
You can decide whether to surrender the lease. If you’d like to get out from under the monthly payments, you can return the car and your debt will be discharged. The dealership has no right to come after you for future payments or late fees.
Under Chapter 13
You can assume the lease and keep making monthly payments; as long as you do you can keep your car.
You can also surrender the lease. The creditor will sell the car and apply the proceeds to your debt. If you owe more than the value of the car, you will be required to pay the difference. That debt will be discharged under your Chapter 13 payment plan.
What if my car has already been repossessed?
If the creditor has already sold or disposed of your car, you have no recourse. If, however, the creditor has repossessed the vehicle but has not yet disposed of it, you can demand that the car be returned. If the creditor has not sold the vehicle, it is still a part of your bankruptcy estate and the automatic stay protects your right to possession of the car.[iv]