Can I keep my Car If I File for Bankruptcy?
That is a question that consumers who are considering filing bankruptcy typically want to know prior to considering bankruptcy as an option for debt relief. A car is something that most people absolutely cannot do without to get to work, pick up kids from school and run errands, so it’s not surprising that the fear of losing a car could hold people back from considering bankruptcy as an option and gaining the debt relief that they need.
What are Bankruptcy Exemptions?
The first thing to consider is that everybody who files for bankruptcy is allowed to claim bankruptcy exemptions. The exemptions you must use are typically based on where you lived 2 years ago and if you no longer live in that state, there is a good chance you will be using the Federal Bankruptcy Exemptions if you are filing in Washington State. Otherwise, Federal or Washington State exemptions may be available to you to protect assets. Most consumers filing in Washington State would only consider Washington State Exemptions if they need to protect a homestead in the form of real estate as the amount allowed for protection is significantly more than the Federal exemption allows.
What is the Bankruptcy Vehicle Exemption in Washington State?
The Washington State bankruptcy exemptions as of November 2022 allow for $3,250 to protect equity in a vehicle which can be combined with up to $3,000 of wildcard exemption that can be used on any asset. The auto exemption can be doubled for a married couple.
Here is an example. if a bankruptcy filer has a vehicle with a private party blue book value of $20,000 and has a bank loan for $15,000 secured to the vehicle, they can use $3,250 of the auto exemption and $1,750 of the wildcard exemption to protect the vehicle. Whether the car has equity is what you should be looking at, if there is no equity a bankruptcy trustee is unlikely to sell the vehicle to only pay the bank back on their loan, they need to make a profit for other unsecured creditors.
What is the Federal Bankruptcy Exemption for My Car?
The Federal Bankruptcy exemptions allow for the protection of $4,450 of equity in a vehicle and a married couple can use this exemption 2 times on 2 vehicles if needed. Additionally, the federal exemptions come with a wildcard exemption worth $15,425 which can be doubled for a married couple and used on any property including bank accounts if no homestead is being protected.
Can I give my Car Back to the Bank in Bankruptcy?
If you decide that you no longer want your vehicle because of an accident or you owe significantly more than it’s worth or because you just don’t like it or want a car payment, you can do that too. Additionally, if the vehicle is under water, you can also check to see if you qualify for a redemption where some lenders may be willing to give you a loan for the value of the car and you can discharge the remaining balance.
Is there a Difference Between How My Car is Handled in Chapter 7 vs. Chapter 13 Bankruptcy?
Yes. In Chapter 13 bankruptcy no assets are sold and if you have non-exempt equity in a vehicle, you may have to pay that amount into your plan to unsecured creditors. Additionally, if your vehicle was purchased more than 910 days ago and is under water, you may be able to cram it down to the current value and the remaining balance can be discharged with your other debts.
In chapter 7 bankruptcy, all assets are subject to liquidation if they are not protected by the exemptions, so before you file, you will want to make sure your equity amount is covered by the available exemptions. Redemptions are also only available in chapter 7 bankruptcy.
As you can see there is a good number of protections for a vehicle to cover most people, but you should talk to a bankruptcy attorney about your situation as everybody has different circumstances. In most cases, the factors that will be looked at is whether a consumer is protecting a home (if so look at WA state exemptions, if not look to federal exemptions), the value of other assets and the equity in a car. Even if you are unable to protect the full equity in your vehicle, you may be able to work out a deal with a bankruptcy trustee in exchange for not selling your vehicle (paying them the difference between what you can protect and the value), and don’t’ forget to factor in the liquidation value which includes the cost to sell a vehicle such as auction fees.