3 options to protect your car in bankruptcy

Justin Harelikq_v2.gifDear Bankruptcy Adviser,
If I want to file Chapter 7 and my car is paid off, can I keep it? It is worth about $31,000. Are there ways to maybe pay the trustee to keep the vehicle? It's the only form of transportation I have!
-- Maritza

a_v2.gifDear Maritza,
It might be possible to file for Chapter 7 bankruptcy and keep the car. Bankruptcy laws vary from state to state. While in bankruptcy, you'll be trying to protect your vehicle from creditors while you eliminate the remainder of your debt. Sometimes you can exempt only some of the vehicle while having some of the value exposed.

For example, the vehicle could be worth $30,000, but you can only exempt $10,000 worth of its value. The other $20,000 would be available for the trustee to distribute to your other creditors after the car's sale.

However, most clients overvalue assets. That means that something worth a lot to you might not have much value on the open market. That could be the case in your situation. You will need to get accurate comparables for your vehicle. You can look at sites like Kelley Blue Book or to find an estimated value. At these sites, you have the option to value the car based on retail value, private-party value or trade-in value. Private-party value tells you what you'd get if you sold the car to some random person on the street. Use private-party valuation for the car, not trade-in value. These sites are sufficient for most vehicles. If your vehicle has many specialty items or is a classic, you will have to rely on trade magazines.

One of the safest ways to determine the value is to do what the trustee will do when you file your case. You can list it for sale yourself and see what you would hypothetically earn. The trustee is the person assigned to your bankruptcy case. He is trying to find assets of yours that he can sell in order to pay creditors. The trustee will either work with an auctioneer in the area or simply list the car for sale in local trade magazines or on Internet sites.

Let's assume that the car does have too much value. Thus, you are able to only protect some of the car's value in a Chapter 7 bankruptcy. In general, three options exist. However, an experienced bankruptcy attorney may have other, legal options to offer.

  1. Surrender the vehicle. It will be sold. You will receive that amount you are able to protect and the rest will be given to creditors. For example, in Nevada, you are able to exempt (protect) $15,000 of the equity. In this case, the trustee will sell the car, give you the first $15,000 and hand over the rest to creditors.
  2. Settle with the trustee. You can pay to protect the car, giving money directly to the trustee to pay your creditors. That is similar to option No. 1, but you do get to keep the car. You are simply paying the amount that you cannot protect.
  3. Convert, or file for, a Chapter 13 bankruptcy. You can pay back in a Chapter 13 bankruptcy what you can't protect in a Chapter 7. As in the above example, if you can't protect $20,000, you then would file for Chapter 13 and pay that amount to your creditor over three to five years under a court-approved payment plan. This is more complicated because each case is unique.

The short answer is "yes," you might be able to protect some of the vehicle's value. You just need to know whether protecting the asset will cost you something. The more you know prior to filing, the better prepared you will be after the trustee starts to review your case.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation.  Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.  Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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