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What Happens to a Car In Chapter 7 Bankruptcy?
One reason that many people are hesitant to consider bankruptcy, and particularly Chapter 7 bankruptcy, is that they fear it will mean losing all of their assets. While Chapter 7 bankruptcy does involve submitting all of your assets, including vehicles, to a bankruptcy trustee so that he or she can determine what assets should be liquidated to pay creditors, that doesn’t mean that you will lose everything when you file for Chapter 7 bankruptcy. In fact, Chapter 7 bankruptcy allows debtors several options to keep their vehicle after filing for bankruptcy and having most debts discharged.
When You Can Keep a Vehicle in Chapter 7 Bankruptcy
It is much easier to keep a vehicle following bankruptcy if you have paid it off and have full ownership. Under California law, vehicles are exempt from the bankruptcy estate if a debtor owns the vehicle and it has equity of less than $2,900 under exemption System 1 or equity of less than $5,100 under exemption System 2. Debtors may use either system to calculate exemptions, and each system has its advantages and disadvantages, though System 2 is better for exempting vehicles from the bankruptcy estate.
If a debtor chooses System 2 and has a vehicle with more than $5,100 in equity, the debtor may use a wildcard exemption of up $1,350. Also, anything left over from the $25,575 homestead or burial plot exemption in System 2 may also be put toward the value of a vehicle to exempt it from the estate. The exemption can be used to cover more than one vehicle, but couples filing Chapter 7 bankruptcy together in California may not double the exemption.
If you own a vehicle that has an amount of equity greater than what is available under any exemptions, you must turn it over to the bankruptcy trustee to be sold, or pay the difference in equity to keep it. If the equity in the vehicle is only slightly above the exemption, the trustee will most likely abandon it and allow you to keep it, though if the value of the vehicle is several thousand dollars above exemptions, the trustee will almost certainly sell it to pay creditors.
Other Options if You Have a Car Loan
Keeping possession of a vehicle that you are still paying off is a bit trickier in Chapter 7 bankruptcy. If the debtor still has a car loan, there are three options for what can be done with the vehicle after filing for bankruptcy in the state of California.
The first option is to reaffirm the loan. This means signing a new contract with the lender to let you continue to possess and make payments on the vehicle after bankruptcy, which could involve a change in monthly payments. This new debt will remain after other debts are discharged, and you will again be on the hook to pay it back, even if you cannot keep up with payments in a few months. The reaffirmation will have to be approved by the court, which requires showing a need for the vehicle, and proving that the repayment plan will not cause an undue hardship.
The second option for what to do with a vehicle in Chapter 7 bankruptcy is to redeem the vehicle. This simply means paying the lender a lump sum to take ownership of the car. In many cases, lenders will settle for less than what is currently owed on the vehicle in order to avoid having to repossess it while still making money off of the loan.
Finally, if you cannot afford your car and the lender will not come to an agreement with you to reaffirm the loan or redeem the vehicle, you may simply surrender it. This means you hand the vehicle over the lender, and the car loan is discharged in bankruptcy along with all other loans. The lender will be able to take possession of the vehicle either when the Chapter 7 proceedings end, or by making a motion with the bankruptcy court.
Thinking About Filing for Bankruptcy?
If you’re having trouble keeping up with your bills and considering filing for bankruptcy, The Law Offices of Melanie Tavare of Richmond can help you understand your options in Chapter 7 or Chapter 13 bankruptcy when it comes to keeping your vehicles. Contact the Law Offices of Melanie Tavare at 510-255-4636 or online.
The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
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