3 options to protect your car in bankruptcy

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

Woman looking out of driver's side window © iStock

Dear Maritza,
It might be possible to file for Chapter 7 bankruptcy and keep the car. Bankruptcy laws vary state to state. While in bankruptcy, you'll be trying to protect your vehicle from creditors while you pay off 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 car. 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 adequate for most cars. If your vehicle has many specialty items or is a classic, you will have to rely on trade magazines.

One of the best 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 the Internet.

Let's assume the car does have too much value. Thus, you are able to protect only some of the car's value in a Chapter 7 bankruptcy. An experienced bankruptcy attorney may have legal options to offer, but in general, 3 options exist:

  1. Surrender the vehicle. It will be sold. You will receive the 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 cash 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 to, 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 3 to 5 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 car's value. You just need to know whether protecting the asset will cost you something. The more you know before filing, the better prepared you will be after the trustee begins to review your case.

And be aware that bankruptcy could wreck your credit. Keep an eye on your credit score for free at myBankrate.

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