What Happens to My Car If I File for Bankruptcy?



Can I keep it?  Please?



Generally speaking, you can keep any vehicle (car, motorcycle, boats, etc.) and file for bankruptcy.  The real question is: Does it make sense to keep a vehicle, in light of certain consequences.  In many cases that answer is - yes!

In Arizona, the law currently says that each person filing for bankruptcy gets to "exempt" $5,000 of equity in a car.  For example, let's say you own a car that is worth $5,000 and you are planning on filing for Chapter 7 Bankruptcy.  If you own that car, you can file for bankruptcy without any consequence as to that car.  If you are married and filing jointly, both spouses get a $5,000 exemption to protect one car each.



This one is probably OK.



So, what happens if your car is worth more?  Let's say you have a car that is worth $8,000.  The law says you can only protect $5,000.  What happens to the extra $3,000?

We refer to that $3,000 as "excess equity" and it is not protected.  This means that your creditors must be compensated for the extra $3,000.  So, what can be done?  First, you could sell the car prior to filing and spend the money on a $5,000 car (the remaining $3,000 could be spent on household expenses prior to filing).  Second, you could compensate the Trustee for the non-exempt equity, meaning you could pay the Trustee $3,000, after you filed, over the course of 6-12 months.  Third, you could turn the car over to the Trustee, let them sell it, pay you the first $5,000 and let the Trustee pay your creditors with the remainder.  Fourth, and lastly, you could get a $3,000 lien against the car prior to filing.  In this last case, you would then be obligated to pay the $3,000 loan as agreed with the lender, but the remaining $5,000 in equity would be protected under Arizona law.

How is this different if you are filing for Chapter 13?  Each of the above scenarios still apply, with the exception of the second scenario above (which is not allowed).  However, Chapter 13 permits a scenario that is similar to the second scenario above.  In a Chapter 13, where there is excess equity in a vehicle, the debtor is permitted to increase their reorganization plan payment in an amount equal to the excess equity.  Let's use the same example as above, but this time they file a 60 month reorganization plan under Chapter 13.  In such a case, the $3,000 would be paid over 60 months in equal installments to the Trustee and it would be in addition to the payment amount they would otherwise be required to pay.  In other words, they can keep the car and pay an additional $50 each month (in addition to the amount required by law to be paid under their reorganization plan).  

As you can see, there are many factors that need to be considered and discussed with your attorney prior to filing for bankruptcy.  If you have questions about what would happen to your vehicles in a bankruptcy, please give us a call to schedule a free consultation.

Please remember, every case is different and the law is constantly changing.  The above should not be considered legal advice and proper legal advice should always be sought prior to filing for bankruptcy.