Motor vehicle exemptions are designed to protect your car, or part of the equity in your car or other motor vehicle, when you file Chapter 7 bankruptcy. Whether you will be able to keep your car depends on which state you live in and how valuable your car is.
Read on to find out what motor vehicle exemptions are and how they work.
In bankruptcy, certain types of property are "exempt" up to a certain dollar amount. If your property is exempt, it means the bankruptcy trustee cannot take it. Exemptions are determined by state law, although some states allow you to use federal bankruptcy exemptions instead of the state exemption system.
Most states, and the federal bankruptcy exemptions, recognize that most people need a car to go to work and to get around in general. For this reason, state and the federal system exempt some equity in a motor vehicle.
To learn more about how exemptions work, which exemption system you can use, and how much your state exempts in motor vehicles, see the articles in Bankruptcy Exemptions.
Whether you will be able to keep your car depends on the exemption amount allowed by your state and how valuable your car is. For example, if you own a car worth $5,000 and your state has a motor vehicle exemption for $7,000, then you are allowed to keep your car.
If you have a car loan, the exemption amount only matters if you have equity in the car (if the car is worth more than what you owe on it) because your car lender’s security interest (lien) is unaffected by the bankruptcy. So if you have a car worth $15,000 but there is a loan on it for $10,000, then you only have $5,000 of equity in the car. This means you can keep it if your car exemption is $5,000 or greater. If you have no equity in your car then you are allowed to keep it because there is no value in it for your creditors.
In the above example, if your motor vehicle exemption was only $2,000, then the bankruptcy trustee would take your car and sell it but you would receive the exemption amount of $2,000 from the proceeds.
Many states also have “wildcard” exemptions that can be used towards any property. If the motor vehicle exemption is not enough to protect the equity in your car, you may be able to use a wildcard exemption to cover the rest of your equity. (To learn more, see Wildcard Exemptions in Chapter 7 Bankruptcy.)
If your car is worth only slightly more than your exemption amount, then it may not be worth it for the bankruptcy trustee to take it because after the cost of selling it and the trustee’s fee there may not be anything left over to pay your creditors. If the trustee chooses not to sell the car in this situation, it's called "abandonment."
Learn more about when the Chapter 7 trustee will abandon your property.