In a previous article (Can I Keep My Car if I File Bankruptcy) we looked at five questions that must be answered each time we are looking at saving a car in bankruptcy. Just to review, the five (5) questions are:
How Many Cars Do You Own? (Really, read the other article. You may be surprised how many cars you "own.") What are 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?
Bankruptcy Rules, Business Bankruptcy Lawyer, Personal Bankruptcy Lawyers,
In order to decide if you get to keep your car when you file for bankruptcy we apply one final test. That test is the:
Automobile Exemption
When a person files for bankruptcy, all of his/her property (both personal and real) is subject to being liquidated in the bankruptcy estate. In order to keep property, the debtor must able to apply a legal exemption to the property. If an exemption applies, the debtor gets to keep 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 may exempt up to $7,000 of equity in one vehicle. In other words, each debtor gets to keep one 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 a few real-life scenarios to see how the Automobile Exemption applies. In each scenario, the debtor is single, filing a chapter 7 bankruptcy, and owns one car.
Scenario 1:
Year: 2001 Make: Chrysler Model: PT Cruiser Condition: Good NADA Value: $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 for the car than it is actually worth (i.e., they're "upside down"). The debtor has the right to keep making payments on the car, and as long as they do so, they may keep their car. Remember, the rule is each debtor gets to keep one vehicle with up to $7,000 of equity. In this example, the car has no equity (or, less than no equity, as it were).
Scenario 2:
Year: 2001 Make: Chrysler Model: PT Cruiser Condition: Good NADA Value: $4,950.00 Outstanding Loan: $0.00 Equity: $4,950.00
The only difference between scenarios 1 and 2 is that in scenario 2 there is no outstanding loan. Once again, the rule is each debtor gets to keep one 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. Therefore...you guessed it! They get to keep their car!
Scenario 3:
Year: 2009 Make: Toyota Model: Camry Miles: 9,500 Condition: Good NADA Value: $19,200.00 Outstanding Loan: $18,352.00 Equity: $848.00
In scenario 3 the debtor owns a car that is worth more than $7,000. Some people get tricked by this piece of information. But remember, we're talking about equity here, not value. And in this example, the debtor only has $848 of equity so they get to keep the car.
As a side note, the debtor in this case decided to surrender the car because the payments each month were more than she could afford. Because her bankruptcy attorney (that's me) set everything up correctly, she was able to drive the car for a couple of more months before giving it back. And because I didn't have her sign a reaffirmation agreement, she wasn't responsible for any additional amount due on the car after it was sold for only $9,000 at auction! (That's a savings of over $9,000 for those of you keeping score.)
I think you probably get the idea about how the Automobile 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 $7000 worth of equity, they'll just have to give the car back."
And you'd be right. Except that you're wrong. But don't feel bad, it was a trick question.
It is still sometimes possible for a person to keep their car even when the equity exceeds $7,000. That is based on the following considerations:
Can any other Exemptions, in addition to the Automobile Exemption, be used? How much more is there than $7,000 of equity? Whose names are on the title to the vehicle?
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 Exemption can be used to save a car.
Scenario 4:
Year: 2003 Make: Chevrolet Model: Suburban Miles: 96,000 Condition: Good NADA Value: $13,450.00 Outstanding Loan: $6,000.00 Equity: $7,450.00
In this example we see that the debtor has $7,450 of equity in his/her vehicle. I did the math and that is more than $7,000. $450 more, to be exact.
Fortunately, in the state where I practice law, there's a thing called the Wildcard Exemption that we can use in this scenario. The law says that each person may exempt an additional $1,000 of property that is otherwise not exemptible. Even better, in the last few years the state legislature amended this exemption to allow for "stacking." Stacking is where more than one exemption can be used for the same asset. More plainly stated, we "stack" one exemption on another to save a single asset (in this case, the car).
Because there is only $450 of additional equity in the vehicle, this problem is easy. The debtor merely "stacks" the $1,000 wildcard exemption on top of the automobile exemption. The result is that all the equity is exempted and the debtor gets to keep the car.
WARNING!
Once the wildcard exemption is used it cannot be used again. Normally this doesn't matter, but it's still worth noting because failing to understand this can lead to extreme disappointment when the trustee is taking someone's property to sell.
SECOND WARNING!
There are factors that can lead to limitations as to what extent 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 evaluate the limitations and work around each.
In an upcoming article, I'll cover what happens when there is more than $7,000 of equity in the car. Specifically we will look at the remaining issues of
How much more than $7,000 of equity is in the car, and... Considering how the names on the car title affects your ability to keep a vehicle.
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