I Own My Vehicle Outright–Will I Lose It If I File Bankruptcy?

by Karen Oakes, Esq.

May 28, 2008

So, you have no choice but to file bankruptcy, but you own a vehicle worth, say $10,000.00. What will happen if you file bankruptcy?

Your co-workers say you will lose it. That you should value it at less than what it is worth. Your attorney says give accurate values.

What really happens? If you file a Chapter 7, if your state’s exemptions only protect $2000.00 of value in a car, your Chapter 7 case has just become what is known as an “asset case”. (For definitions of bankruptcy terms, see the glossary at Bankruptcy Law Network.) The Chapter 7 Trustee will be pleased as the trustee earns a commission on the liquidation of assets into cash so that the trustee can pay creditors, as outlined by my colleague, Michael Doan, a California bankruptcy attorney. The trustee will contact you or your attorney to determine whether you are willing to come up with the money to keep that vehicle. If you are not, then yes, the trustee will hire someone to come get the vehicle and then sell it. If you are willing to come up with the cash, then you are given the opportunity to purchase the vehicle from the estate.

WHAT?!? You will have to purchase your own vehicle? When a person files bankruptcy, an estate is immediately created. You are not your estate. You no longer are in charge of your property as all of your property is part of the estate. Exemptions are laws/statutes that protect property or part of property for the debtor, as explained by Craig Andresen of Minnesota at Bankruptcy Law Network Each state has their own set of exemptions and each state is different. Some states use the federal exemptions; other states have opted out of the federal exemptions and have their own exemptions. Where you live makes a difference in this case. The Bankruptcy Court appoints a trustee to manage the estate and that trustee is in charge of the estate and any decisions involving the estate. This is true for either Chapter 7 or Chapter 13 cases.

A Chapter 7 case’s timeline is very short. The typical amount of time between filing and discharge of the debtor is only 110 days. If you have filed a Chapter 7 with that vehicle, the Trustee is under timeline guidelines to finish that case quickly. The Trustee will want to liquidate assets, if any, and close the case.as explained by Jed Berliner, a Massachusetts bankruptcy attorney. Trustees will sometimes accept payment arrangements but those arrangements are typically very short (for example, from 30 days to 180 days). You or your attorney may be able to negotiate with the trustee to deduct the costs of sale or expenses from the amount you have to pay the estate. The bottom line is, you can keep your car, but you will have to pay to keep your car.

In these cases, sometimes it is less stressful to file a Chapter 13 case. The same rules apply in a Chapter 13 case, but the difference is — is that you have a longer period of time to pay the Trustee the money to keep your vehicle. Every Chapter 13 debtor makes payments to the Trustee and the Trustee pays creditors as outlined in the Debtor’s Plan, as explained by Cathy Moran, a California member of the Bankruptcy Law Network. The amount of money you have to pay under these circumstances is called a “best interest number”. That means, you have to pay your creditors in a Chapter 13, what the creditors would have gotten if you had filed a Chapter 7. It is in the best interest of the creditors that you do that (that’s how that phrase came about). A debtor can also deduct the amount of money that the Chapter 7 trustee would have been paid for liquidation of the asset, typically another 25% of the total value of the car. Since the Chapter 13 trustee’s commission (the 13 Trustee is paid a commission too — on all payments he makes for the debtor) is less than 25%, sometimes the filing of a Chapter 13 case can result in some savings for the debtor who owns their vehicle.

An experienced attorney can analyze your situation and provide legal advice on which option is best for you. A bankruptcy petition preparer cannot give you legal advice or analyze this set of facts, as outlined in my recent blog. A debtor working without an attorney can do serious damage to their financial situation. As my colleague, Rachel Foley of Missouri states in a recent blog: Think Twice!! Do not file a bankruptcy without seeking an experienced attorney’s advice under these circumstances!!

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.

Last modified: October 22, 2012