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Bankruptcy Exemptions To The Rescue: Your Car And Chapter 7

5 May 2021

Arthur Young

All those bills you've been unable to pay are about to go away and now you can make a fresh start with your finances. You may have heard that chapter 7 bankruptcy is also known as the liquidation bankruptcy, and that issue is not as well understood as the debt relief angle. Read on to learn about the power of the bankruptcy exemption when it comes to hanging on to property like your vehicle.

What Are Bankruptcy Exemptions?

You might want to think of a bankruptcy exemption as a way to reduce the value of your property. Why would anyone want to do that? It's all connected to the way chapter 7 filers are subject to the seizure of assets. That sounds a bit scary, but you should know that very few filers ever lose any property like a car or other assets. Here is what to know about bankruptcy exemptions:

1. Each state has unique exemptions. Be sure you know how your state of residency treats your assets.
2. Exemptions cover several categories of property and not all states name vehicles specifically. Some states allow filers to use a wildcard exemption that can be used for anything they wish, such as a vehicle.
3. Using an exemption allows you to remove some or all of the value of your vehicle, and that will probably make it safe from the bankruptcy trustee. Here is an example: Your vehicle has a value of $20,000 and you owe $15,000 on the auto loan. That leaves you with an asset value of $5,000. Your vehicle is safe from seizure if your state allows you an exemption of at least $5,000.
4. Keep in mind that married filers who are filing jointly can double their exemptions in some states. Along those same lines, if you recently moved to a new state, you may be able to use the exemptions from your previous state if you file within the time allowed. Finally, some states allow filers to choose between state exemptions and federal exemptions. A careful study of exemptions is in order.

Repossessions, Bankruptcy, and Reaffirmations

While an exemption could keep your vehicle safe from seizure, you must not allow it to be repossessed. Once you file, your vehicle has only limited protection from repossession if you are behind on your auto loan payments. Speak to your bankruptcy lawyer about continuing to make payments on your auto loan and about reaffirming your loan. Doing so can help you keep a vehicle as long as you promise to continue paying the loan as previously agreed.

Consult with a bankruptcy lawyer to learn more.

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