Bankruptcy’s purpose is to give filers a fresh start, not to deprive them of the property they’ll need to work and live. And one concern of almost everyone filing for bankruptcy is whether they’ll be able to keep their car. That’s where motor vehicle exemptions help. Most states have a motor vehicle exemption designed to let bankruptcy filers protect a modest vehicle. Read on to find out how you can use a motor vehicle exemption to protect your car or other means of transport.
In bankruptcy, certain types of property are "exempt" entirely or up to a certain dollar amount. Each state has a set of exemptions, and the protections vary widely. Some states even allow a filer to choose between the state and federal bankruptcy exemption system. A filer can use whichever system will work best.
While you keep exempt property, what will happen to your nonexempt property—property not protected by an exemption—will depend on the chapter you file.
In Chapter 7, the trustee sells your nonexempt property for the benefit of your creditors. If your property is exempt, the Chapter 7 bankruptcy trustee can’t take it. By contrast, you’ll repay your creditors some of what you owe in Chapter 13. You also get to keep all of your property. The catch is that while you don’t have to pay creditors the value of exempt property in your Chapter 13 repayment plan, you must repay the value of your nonexempt property.
Learn more about your property and exemptions.
Whether you’ll be able to keep your car will depend on the exemption amount allowed by your state, as well as the amount of equity in it. For instance, if you own a car worth $5,000 and your state’s motor vehicle exemption is $7,000, the vehicle will be fully protected.
If you have a car loan, the exemption amount only needs to protect the amount of equity you have in it—not the entire value. So if you have a car worth $15,000, but you owe $10,000, then you only have $5,000 of equity in the vehicle. You’ll be able to protect it if your car exemption is $5,000 or higher.
In Chapter 7 bankruptcy, the trustee will sell the car, pay off any loan, and give you the exemption amount. Your creditors will receive the remainder after the trustee deducts sales costs and fees. The trustee wouldn’t sell the car if after deducting these costs, nothing remained for creditors. This is known as abandoning the property.
In Chapter 13, you’d keep the car, but you’d pay your creditors an amount equal to the unprotected equity minus the amount it would cost to sell the vehicle.
Many states have a “wildcard” exemption that can be used towards any property. If the motor vehicle exemption is not enough to cover your car equity, you might be able to protect the entire amount using a wildcard exemption. Find out more by reading Wildcard Exemptions in Chapter 7 Bankruptcy.