Can I Keep My Car If I File Chapter 7 Bankruptcy in Pennsylvania?
Filing for bankruptcy can be a frightening proposition if you’re concerned about the future of your personal property. You may be most concerned about whether you’ll be able to keep your car. Skilled bankruptcy attorneys get this question all the time. And as we try to explain it, we discover there are many misunderstandings as to the ways in which Bankruptcy Law protects your car. Call the Pennsylvania Chapter 7 bankruptcy attorneys of Young, Marr & Associates if you are contemplating filing for bankruptcy, and you want to keep your vehicle. We offer free and confidential consultations at this critical juncture of your life. Call us at (215) 607-7478 to schedule a free consultation.
How Does Bankruptcy Protect My Car?
Keeping a car falls well within the concept of the “fresh start” that is a driving force in Bankruptcy Law. Most Americans need their car as a principal means of transportation. For this reason, there are mechanisms known as “exemptions” built into the US Bankruptcy Code that make it possible to protect your car when you file for bankruptcy. Many of our clients have questions about this legal concept known as “exemptions.” If you are considering filing for bankruptcy under Chapter 7, you may be wondering if the process can result in the sale of your car in order to pay other debts. While this is possible, experienced attorneys will work with you to make the exclusion of your car out of the bankruptcy process a priority. When you discharge your debts in bankruptcy, this means you will not be legally obligated to pay them.
Not all debts can be discharged in bankruptcy such as child support, alimony or most tax debt. Due to the need to pay these debts, certain assets are sold to satisfy the non-dischargeable debts. While some assets may be sold, bankruptcy law provides these essential protections called exemptions. With the right legal representation, exemptions provide key advantages, including those that will allow you to keep your car.
What Bankruptcy Exemptions Apply to My Car?
Exemptions are the provisions of the US Bankruptcy code excluding or exempting a certain amount owed out of the bankruptcy process. This means the property will not be liquidated or sold as part of the bankruptcy process. If the exemption analysis is done correctly, then you will not have to lose the qualifying property you own. A skilled Pennsylvania bankruptcy attorney will help you navigate through that part of the process.
When an item is exempt, this usually means that it will not be sold or liquidated as part of the bankruptcy proceedings. Skilled bankruptcy attorneys usually claim exemptions at the outset of the bankruptcy filing. An experienced bankruptcy attorney will be able to give you a heads up on the exemptions and about the repercussions of this analysis in your property interests.
In the case of your car there are three important exemptions:
The Motor Vehicle Exemption
Pursuant to Section 522(d)(2) of the US Bankruptcy Code, debtors can take an exemption in one vehicle for a total “interest’ or value of up to $4,000. To reach a final determination of the exact amount that will be exempt, you will look at the market value of your car, commonly known as the “blue book” value to make the calculation. For example, you will subtract the blue book value amount to the total debt owed, and you can take an exemption up to the $4,000 allowed under the code. If the amount is within limits, your car will not be liquidated under Chapter 7. If the amount is close, an experienced Philadelphia bankruptcy lawyers can help you.
The Wild Card Exemption
In addition, Pennsylvania residents have access to a “wildcard” exemption of $300. While it can be applied for any purpose, a lot of people decide to use it to be able to keep their car.
The “Tools of The Trade” Exemption
Pursuant to Section 522(d)(6) of the US Bankruptcy Code, you can seek an additional exemption for your car if it’s considered part of your business or “tool of the trade.” Debtors can exempt up to $2,525 of tools of the trade they or their dependents own. The US Bankruptcy Code allows for these exemptions to overlap with other exemptions. For example, a motor vehicle sometimes can be claimed as exempt so that a car worth about $6,500 could be claimed by combining these sections. When the wild card exemption is added up, you can get $6,450 exempted.
What is “Equity” of the Car Value?
The equity in your car is essentially the fair market value of your vehicle minus the remaining balance of your loan. Therefore, if you still owe $11,000 on your vehicle and the fair market value is $8,500, then you have no equity. While this might be financially frustrating, it does mean that your car has no value in the bankruptcy estate and is protected from being sold without the aid of an exemption.
However, if you do not currently have a car loan, the equity is the full fair market value. This could prove troublesome under bankruptcy. If you file for Chapter 7 under these circumstances, you could be required to turn your vehicle over to the trustee to be liquidated or have your case converted to Chapter 13, where you would be required to pay the value of your car to unsecured creditors. It is critical to discuss the value of your vehicle with our seasoned bankruptcy attorney before filing.
Car Repossession and Chapter 7 Bankruptcy in Pennsylvania
The repossession of your car could be crippling, limiting your ability to work or manage daily household chores and errands. Chapter 7 can provide a remedy through an automatic stay. An automatic stay is a court injunction that goes into effect the moment you file a bankruptcy petition. This injunction stops all collection actions against you, including the repossession of your car. If your repossessed car was not sold, it must be returned to you. However, once that happens, you must cure the default within 30 days to maintain possession of your vehicle.
Another option is to redeem the car by paying the fair market value in a lump sum within 30 days after filing for bankruptcy. The fair market value is usually the “blue book” value. Some financial institutions offer redemption loans for this purpose.
There are multiple options related to your car when you file for bankruptcy under Chapter 7. You can either exclude the car if you can meet the exemption requirements or seek on the following three options:
- Surrender or give up the car and getting the car’s debt discharged or eliminated.
- Redeem your car by paying the fair market value in a lump sum within 30 days after filing for bankruptcy. There are redemption financing institutions. The fair market value is usually the “blue book” value.
- Reaffirm your debt means you will be obligating yourself to pay the debt. The reaffirmation is just as if you didn’t file bankruptcy, which means your car may be subject to repossession if you stop paying the debt during the pendency of the bankruptcy case.
Cramdowns or Repossessions and Chapter 13 Bankruptcy in Pennsylvania
Cramdowns are only available in a Chapter 13 bankruptcy. In Chapter 13, a debtor proposes a 36 or 60-month payment plan to pay all or a portion of their debts. One of the benefits afforded to debtors is the possible ability to lower their monthly car payment. Called a cramdown, a debtor would propose this in their bankruptcy plan. However, certain restrictions exist.
The proposal in the bankruptcy plan would include paying the fair market value of your vehicle instead of the full remaining loan balance. For example, if you owe $16,000 on your car note and the “blue book” value of your car, due to depreciation, is $9,500, the bankruptcy plan will propose paying the “blue book” value. The remaining balance of the loan is classified as nonpriority unsecured and either discharged or partially paid based on the facts of your case.
An additional benefit of cramming down a car payment is the lowering of your monthly expenses. To see this in a practical sense, if you have three years remaining on a $16,000 loan, your monthly payment is approximately $444. Now, if you cram that amount down to $9,500 over the length of your bankruptcy plan, the average monthly payment will be approximately $159. That allows you nearly $300 extra a month for your other expenses or to pay into your bankruptcy plan, depending on what other debts you had. Often, a debtor filing primarily to cure a mortgage foreclosure will utilize a cramdown to make their bankruptcy manageable.
Cramdowns have limitations and restrictions. Most importantly, you must have owned the car for at least 910 days. If you just purchased your vehicle, you cannot cram down the loan. Additionally, lenders are not usually happy with debtors paying less than the full amount of the loan balance. While you have an absolute right to cramdown a vehicle loan, there are steps lenders take to make the process more difficult.
The first thing a lender will question is the fair market value a debtor assigns to their vehicle. While the “blue book” value is evidence of the approximate value of a vehicle, it does not take into consideration the actual car in the bankruptcy case. Fortunately, neither the lender nor the debtor benefits from any protracted litigation to determine the value of the vehicle. As a practical matter, if the vehicle value is questioned, the parties resolve the issue without the interference of the court. Our skilled Pennsylvania bankruptcy attorneys will work to have your car valued at the lowest amount possible.
Once the value is determined, the remaining balance of the loan is considered nonpriority unsecured debt. This means, depending on the facts of your case, including income, expenses, and exempted assets, the amount could be paid in full, partially paid, or completely eliminated. If, in your case, the debt would be completely eliminated, a lender could question other aspects of your bankruptcy, including your income, your listed monthly expenses, or the calculation of your available disposal monthly income. The attorneys at Young, Marr & Associates will carefully draft your bankruptcy schedules and review your documents and financial information to limit creditors’ or the trustee’s ability to question your filing.
Another advantage to Chapter 13 bankruptcy filers, even if you do not qualify for a cramdown, is stretching a car loan out over an extended period. For example, you have 36 months left on your car loan when you file for bankruptcy and your monthly car payment is challenging under your present financial circumstances. The bankruptcy plan could propose paying the entire car loan off over the 60-month life of the bankruptcy. This would dramatically reduce your monthly financial obligations.
Similar to Chapter 7, filing Chapter 13 can stop a pending repossession or, if the vehicle was not sold, require a repossessed car to be returned to you. The significant difference between Chapter 13 and Chapter 7 is a debtor does not have to pay the full default amount in 30 days. Any delinquency on your car loan would be paid through the bankruptcy plan.
Pennsylvania Bankruptcy Lawyers Offering Free Consultations
Bankruptcy is plagued with many misconceptions and myths. Often, a person considering filing for bankruptcy is scared of possibilities that are not only unlikely but impossible. Additionally, when an individual sits down and reviews the process with our seasoned attorney, they are surprised at some of the unforeseen benefits filing for bankruptcy provides. The experienced team of bankruptcy attorneys working at Young Marr & Associates stands ready to assist you. We have offices conveniently located throughout Pennsylvania and New Jersey. To schedule a consultation call (215) 607-7478.