Can I Keep My Paid Off Car in Chapter 7?

In many parts of modern America, a car is a necessity. Unless you live in an area with a strong public transportation network, a car is required to get to work, get groceries, and to just get around in general. For this reason, many people considering Chapter 7 bankruptcy fear what will happen to their car, especially if it is paid off. The last thing you want after bankruptcy is to have to purchase a new care and the monthly payment that comes with it. Fortunately, it is possible to keep your paid-off vehicle, but it is a little complicated. Let’s take a more in-depth look. 

How Chapter 7 Bankruptcy Works

Chapter 7 bankruptcy is commonly referred to as liquidation bankruptcy. This is because it involves the liquidation of assets in order to pay off your debts. First, you must file a petition with the court. Once this is done, an automatic stay is put in place, stopping most collection efforts from creditors, including phone calls, lawsuits, and wage garnishments.

Next, the court will appoint a trustee in your case. This court employee will compile a list of your debts and assets. They will then schedule a meeting of creditors. This is where you will be interviewed regarding your debts and financial situation. Your creditors are allowed to attend this meeting as well, but it is rare that they actually attend. 

Finally, the liquidation phase can begin. Your trustee will determine which of your assets are exempt and which are nonexempt. All nonexempt assets will be sold and the proceeds used to pay off as many of your debts as possible. After this process is completed, any remaining debt is discharged, allowing you to move on with your life and begin rebuilding your financial health. 

The Importance of Asset Exemptions

Asset exemptions are an important part of Chapter 7 bankruptcy. The idea is that they allow you to keep essential assets, including your primary residence, personal belongings, retirement funds, and vehicles. Imagine if these possessions were not exempt. Chapter 7 bankruptcy would leave you with literally nothing. It would be almost impossible to get back on your feet. This is why asset exemptions are so important. Without them, Chapter 7 bankruptcy would be life ruining and almost no one would use it. Asset exemptions ensure that Chapter 7 bankruptcy is a useful tool designed to help people, not hurt them. 

Determining Equity in Your Vehicle

Whether or not a vehicle is considered exempt under Chapter 7 bankruptcy is determined by the amount of equity you have in it. A vehicle is considered nonexempt if you have less than $5,025 of equity in it. 

To determine the amount of vehicle equity you have, you will need two pieces of information. These are:

• The Market Value of Your Vehicle: This is how much your car is worth if you were to sell it today. Kelley Blue Book (KBB) is the most commonly used tool for discovering this information. It will estimate value based on your car’s make, model, year, mileage, features, and condition. 
• Your Outstanding Loan Balance: This is the total amount you still owe on your car loan. Your latest loan statements or online account with your lender should show your remaining loan balance.

To calculate your vehicle equity, you simply subtract the outstanding loan balance from the market value of your vehicle. The number you end up with is your vehicle equity.

Can You Keep Your Car When It’s Paid Off?

It is possible to keep a paid off car during Chapter 7 bankruptcy. However, the vehicle’s value must be under the exemption limit of $5,025. A vehicle with a value over this amount will likely be sold by your court appointed trustee. 

Options If Your Car Exceeds the Exemption Limit

Unfortunately, there are not many options available if your car exceeds the exemption limit. If your car is paid off and over the exemption limit, you will receive the amount of the exemption limit back in cash, which will be $5,025. You can use this money to buy a used car to replace the one that was sold. On the other hand, if you still owe on your car, you can affirm the debt. To do this you must be current on payments. This is basically an agreement that your vehicle debt will not be included in the bankruptcy and you will continue to make payments on the car.

Tips for Protecting Your Paid-Off Vehicle

There are a few tips for protecting your paid off vehicle during bankruptcy. First, is if your car is used for work purposes. This will make it subject to a higher exemption limit. If that is still not enough, you may be able to argue to the court that it is essential to your livelihood. Another tip is to use wildcard exemptions. These are exemptions that can be applied to anything you choose. In Pennsylvania, this amount is $300. Sometimes, adding this amount will get your vehicle under the exemption limit.

The best tip for protecting your paid off vehicle is to hire an experienced bankruptcy attorney. We can help you navigate the entire bankruptcy process and do our best to protect assets that are essential to your way of life, including your personal vehicle.