Three Options to Protect Your Car in a Bankruptcy

Filing for bankruptcy can be overwhelming, especially for newlyweds. While you can usually keep your vehicle if you file Chapter 13 bankruptcy, your car may be in danger if you file for Chapter 7 bankruptcy protection. The measures you must take to protect the car depend on your situation, as well as on state bankruptcy laws.

Cars in Bankruptcy

As soon as you file for Chapter 7 bankruptcy, an automatic stay prevents any lender with a lien on your vehicle from repossessing it. Even if a lender has already repossessed the vehicle, the automatic stay prevents him from selling it to recover the debt. In either case, your bankruptcy trustee may seize the vehicle, sell it and use the proceeds to pay your creditors.

State Vehicle Exemption

Every state has a set of exemptions that applies to debtors in bankruptcy. Each exemption allows the debtor to remove certain property from the bankruptcy proceedings. If your state has an exemption for vehicles, you can use it to protect your car during bankruptcy. However, most state vehicle exemptions place a limit on the value of the exempt vehicle. If your car is worth more than the limit, the trustee will seize the car, pay the amount of the exemption to you and use the car's remaining value to pay your creditors.

Wildcard Exemption

If your state has no vehicle exemption, or if your car's value exceeds the limit, you may be able to use a wildcard exemption to keep the car. A wildcard exemption is a bankruptcy exemption that debtors can use to exempt any property of their choice from bankruptcy proceedings, as long as the value of the chosen property doesn't exceed the wildcard's limit. You can use the wildcard by itself or, if your state offers both, you can use it in combination with a vehicle exemption.

Pay the Difference

If your vehicle exceeds all allowed exemptions, you may be able to protect it by paying the difference to your trustee. For example, if your state allows you to exempt vehicles worth up to $5,000 and you own a vehicle worth $8,000, you can offer your trustee $3,000 cash in exchange for allowing you to keep the car.

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