In a previous article (Can I keep my car if I file for bankruptcy) looked at five questions that need to be answered any time we’re looking to save a car in bankruptcy. Just to review, the five (5) questions are:
- How many cars do you have? (Seriously, read the other article. You might be surprised at how many cars you “own”.)
- What is the year, make, model and condition of each of your vehicles?
- How much is each vehicle worth?
- Are there any loans against the vehicles?
- Is there equity in the car?
To decide if you can keep your car when you file for bankruptcy, we apply a final test. That test is:
automotive exemption
When a person files for bankruptcy, all of their assets (both personal and real) are subject to being liquidated in the bankruptcy estate. In order to keep the property, the debtor must be able to apply a legal exemption to the property. If an exemption applies, the debtor keeps the property. Since we are talking about automobiles, it is important to understand the Automobile Exemption. This varies by state, but where I practice law, the code states that a debtor can exempt up to $7,000 of equity in a vehicle. In other words, each debtor gets to keep a vehicle with up to $7,000 in equity (equity is the difference between what you owe and what it’s worth).
So let’s take a look at some real-life scenarios to see how the car exemption applies. In each scenario, the debtor is single, files a Chapter 7 bankruptcy, and owns a car.
Scenario 1:
- Year: 2001
- Make:Chrysler
- Model: PT Cruiser
- Condition: Good
- Value NOTHING: $4,950.00
- Outstanding Loan: $8,692.00
- Equity: -$3,742.00
In this scenario, the debtor owns a vehicle that has negative equity, meaning they owe more on the car than it is actually worth (ie, it is “upside down”). The debtor has the right to continue paying for the car, and as long as he does, he can keep his car. Remember, the rule is that each debtor gets to keep a vehicle with up to $7,000 of equity. In this example, the car has no equity (or less than no equity, so to speak).
Scenario 2:
- Year: 2001
- Make:Chrysler
- Model: PT Cruiser
- Condition: Good
- Value NOTHING: $4,950.00
- Outstanding Loan: $0.00
- Estate: $4,950.00
The only difference between scenarios 1 and 2 is that in scenario 2 there is no outstanding loan. Again, the rule is that each debtor gets to keep a vehicle with up to $7,000 of equity. In this example, the car has only $4,950 in equity, which is less than $7,000. So… you guessed it! They keep their car!
Scenario 3:
- Year 2009
- Make:Toyota
- Model: Camry
- Miles: 9,500
- Condition: Good
- Value NOTHING: $19,200.00
- Outstanding Loan: $18,352.00
- Estate: $848.00
In scenario 3, the debtor owns a car worth more than $7,000. Some people are misled by this information. But remember, we’re talking about fairness here, not value. And in this example, the debtor only has $848 of equity, so he can keep the car.
As a side note, the debtor in this case decided to surrender the car because each month’s payments were more than he could afford. Because his bankruptcy attorney (that’s me) arranged everything correctly, he was able to drive the car for a couple more months before returning it. And because I didn’t ask her to sign a reaffirmation agreement, she wasn’t responsible for any additional amounts owed on the car after it sold for just $9,000 at auction! (That’s a savings of over $9,000 for those of you keeping score.)
I think you probably have an idea of how the Car Exemption works. It really isn’t complicated.
So now I’ll complicate it. (I’m a lawyer, it’s what I do).
What happens when a person owns a car that has more than $7,000 of equity? Well, if you’ve been following along, you’re probably saying, “Well, the exemption covers $7,000. If they have more than $7,000 in equity, they’ll just have to return the car.”
And you would be right. Except you’re wrong. But don’t feel bad, it was a trick question.
Sometimes it is still possible for a person to keep their car even when the equity exceeds $7,000. This is based on the following considerations:
- Can other Exemptions be used, in addition to the Automobile Exemption?
- How much more is there than $7,000 of capital?
- Whose names are on the vehicle title?
Let’s take a look at one more scenario to see how these factors work. The purpose of this example is to show how an Additional Waiver can be used to save a car.
Scenario 4:
- Year 2003
- Make: Chevrolet
- Model: Suburban
- Miles: 96,000
- Condition: Good
- Value NOTHING: $13,450.00
- Outstanding Loan: $6,000.00
- Estate: $7,450.00
In this example we see that the debtor has $7,450 of equity in his vehicle. I did the math and that’s over $7,000. $450 more, to be exact.
Fortunately, in the state where I practice law, there is a thing called the Wild Card Exemption that we can use in this scenario. The law says that each person can exempt an additional $1,000 of property that would not otherwise be exempt. Even better, in recent years state law has modified this exemption to allow “stacking.” Stacking is where more than one exemption can be used for the same asset. Put more bluntly, we “stacked” one exemption on top of another to save a single asset (in this case, the car).
Since there is only $450 of additional equity in the vehicle, this problem is easy. The debtor simply “stacks” the $1,000 wild card exemption on top of the car exemption. The result is that the entire estate is exempt and the debtor gets to keep the car.
CAVEAT!
Once the wildcard exemption is used, it cannot be used again. Normally this doesn’t matter, but it’s worth pointing out because not understanding this can lead to extreme disappointment when the trustee is taking someone’s property to sell.
SECOND WARNING!
There are factors that may place limitations on the extent to which exemptions can be used. These limitations are not always complex, but they are too detailed to cover in this article. Your bankruptcy attorney will know how to assess the limitations and work around each one.
In a future article, I’ll cover what happens when there’s more than $7,000 of equity in the car. Specifically, we will examine the outstanding issues of
- How much more than $7,000 of equity is in the car and…
- Considering how the names on the car title affect your ability to maintain a vehicle.