Monday, November 1, 2010

Can I Keep My Car If I File For Bankruptcy?

Unfortunately, the asnwer depends on the specific situation in each individual case. What's important is that one needs to know the rules and play by the rules.  This is called bankruptcy planning.

First, it depends on whether your car is paid for or whether you are still making payments on it. That is, a preliminary issue is whether there is any "equity" in your car.  Thus, the first question you should ask yourself is: how much is my car worth?  You can look up your car's value at I like this site better than the official Kelly's Blue Book site because it allows you enter most of the information much faster and let you get values faster.

Once you know your car's value, you need to look to your state's law to see how much car you can exempt.  For instance, in Virginia that exemption is $2000.00, while in Florida, it is $1000.00 (with another $1000.00 available for any personal property).  Virginia, though, is tougher than most states when it comes to bankruptcy, notwithstanding the above comparison with Florida.

So what do you do if your car is worth more that the state exemption?  Well, you would need to see if you can exempt the excess value under some other category of exemptions.  For instance, in Virginia you can use your "homestead exemption" (which is generally up to $5,000.00, plus $500.00 for each dependant) to exempt the value of your car in excess of the allowed state exemption of $2,000.00. Of course, you can only do this if you have "room" (unused portion) in your homestead exemption, i.e., you are not using it fully to exempt your house or something else of value.

Another thing to be mindful about here is that there is a special procedure for using your homestead exemption to exempt some other asset, such as a car.  You need to draft and record a homestead deed in the appropriate county land records office, and you must do so in a timely manner.

What if you are still making payments on a car?  In that case, the bank will probably send you a reaffirmation agreement.  The problem with such an agreement is that, if you continue to pay for your car and hit hard times again even 
after bankruptcy, the bank can go after you not only for the car, but also for any deficiency that is likely to be there after the bank repossesses the car. By contrast, if you don't sign a reaffirmation agreement, as long as you continue to make payments on the car, the bank will probably leave you alone.  Notice that I said "probably," because technically the bank in most cases has the right repossess your car based on the mere fact that you have filed for bankruptcy (based on a clause in your purchase contract signed when you bought your car).  Thus, it all depends on what risk you are willing to take.  Some people do not like to take even a very small (de minimus) risk.  From experience, most people are ok with simply making payments on their cars without signing a reaffirmation agreement, but everyone's situation and risk-aversion are different.

In bankruptcy, it is all about knowing the rules, planning accordingly, and playing by the rules.

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