To start, a chapter 7 bankruptcy is also known as a liquidation bankruptcy, which means that a Chapter 7 Trustee will liquidate any of a debtor’s assets he or she can in order to satisfy the debtor’s liabilities. However, certain assets are exempt from liquidation, meaning that the Chapter 7 Trustee cannot liquidate those assets, and the debtor will be allowed to keep them.These exemption laws vary by state, which is why this article is only applicable to the state of California.
The first step in the analysis is to find out the value of your car. For purposes of exemptions, it is usually sufficient to estimate the vehicle’s value from Kelley Blue Book, which you can access online and at no cost. After that, the analysis can go one of two ways.
If you are still paying off your car and it is worth less than what you owe on it, the Chapter 7 Trustee will have no interest in liquidating the car because the lender will obtain all the money. As a result, you have no equity in the vehicle which could be used to satisfy your debts. However, you will need to sign a reaffirmation agreement with the lender, which generally requires that you are current on your car payments. For more information on reaffirmation agreements, you may want to refer to one of our past articles, which can be found at http://thevclawgroup.com/to-reaffirm-or-not-to-reaffirm.
If you own the vehicle outright or owe less on the car than it is worth, you will need to make sure that your financial interest in it is covered by exemptions. In California, a debtor is given the option of choosing one of two systems of bankruptcy exemptions. In the first, a debtor is given a motor vehicle exemption of $3,300. As a result, if a debtor’s car is worth $3,300 or less, or if the vehicle is worth $3,300 or less more than the debtor owes on the car, he or she will be able to keep it, and the Chapter 7 Trustee will not be able to liquidate it. In addition, under that same exemption system, a debtor is given $1,100 in wildcard exemptions to use for any property, as well as a $20,725 exemption for his or her homestead, and any unused portion of that exemption can be applied towards other property, such as a vehicle. As a result, under the first exemption system, the amount of exemption that can be used for one or more motor vehicles is flexible depending on a debtor’s circumstances. In the second exemption system, motor vehicles are given an exemption in the amount of $2,550.
Please also note that even if your vehicle is worth more than you owe on it, you will still need to execute and file a reaffirmation agreement.
Please note that there are certain exceptions to these general rules, such as if your car is deemed to a be a tool of your trade. In addition, the bankruptcy exemptions are often amended and thus change in amount. You should speak to a local bankruptcy attorney to help you determine if your car would be protected in a chapter 7 bankruptcy petition.
For more information, please contact us at the VC Law Group via telephone at (858) 519-7333 or email at info@thevclawgroup.com.