Written by: Michael O. Wells
This is one of the most-asked questions that we get. Many people who are good candidates for Chapter 7 bankruptcy protection hesitate to see a lawyer because they assume that they would lose their car by filing for Chapter 7. In reality, nearly all of our clients are able to keep their car when filing for Chapter 7. This subject will likely be the topic of multiple blog posts, but I would like to lay out the most common situations in this one.
WHEN YOUR CAR IS PAID FOR
If you own your vehicle outright, you would want to exempt your vehicle (so that the Trustee does not sell your car to raise funds to pay your creditors) using the Virginia “poor debtor” statute that related to automobiles: Va. Code Ann. § 34-26 . This exemption allows you to exempt up to $6,000.00 of equity in a car or truck. If you and your spouse own a vehicle jointly, the two of you can exempt a vehicle up to $12,000.00 in value. Oddly enough, if you and your spouse own multiple vehicles jointly, you can only use the joint exemption on one vehicle. Any value in the vehicle that is not exempted with § 34-26 may be exempted using the homestead exemption, Va. Code Ann. § 34-4. So, for example, if you have a vehicle that is worth $8,000.00 you can use the automobile exemption of $6,000.00 and then use $2,000.00 of your homestead exemption to fully exempt the car. People under 65 years of age only have $5,000.00 in homestead exemption available, and some of the exemption may be needed for other types of personal property, so you may not be able to use all of your homestead exemption on the vehicle. The maximum value of a vehicle that you can exempt would be $11,000.00 for an individual, and $22,000.00 for a vehicle jointly owned with a spouse. In determining the value of the vehicle, use a service such as Edmunds.com, KBB.com, or NADA.com to appraise your vehicle for “private-party” sale value, not “dealer retail”.
WHEN YOUR CAR IS BEING FINANCED
If you are financing your car, there is usually not going to be a lot of equity in the vehicle (equity being the value of the car less the pay-off on the car loan), so the automobile exemption should be sufficient to exempt the equity. The car loan itself can be re-affirmed, that is, you and the car loan company agree that the loan will be re-affirmed and survive the bankruptcy discharge by execution of a reaffirmation agreement, which is then filed with the bankruptcy court for approval. This can be an attractive option, as the reaffirmed debt is shown on your post-bankruptcy credit reports as a “live” loan, and your subsequent payments on the loan will help to restore your credit rating. You must remember to keep paying on the loan during and after your bankruptcy filing without fail so that you don’t risk having the loan company move to repossess the vehicle for non-payment. The loan company will stop sending you monthly statements when they get notice of your bankruptcy filing, and will stop on-line payments or automatic drafts as well, and you will need to send payments in by mail or by making in-person payments if the bank or loan company has a local branch.
There are instances when reaffirming the car loan is not the best option for the debtor, and I will address these situations in a later blog post.