Filing Bankruptcy and Keeping Your Car

Audi A5 Cabriolet 3.2 FSI front 20101009 Right after I am asked if a client can keep a house, I am usually asked if they can keep their car when they file for Chapter 7 bankruptcy in Michigan. Cars are really important especially in this area where we don’t have a very good public transportation system. We need cars to get to work, get the kids to school, and take care of all of our daily errands.

First we need to figure out if your car is even an asset. Remember, the Chapter 7 Trustee is interested in assets. Your car has to be worth more than you owe to be an asset. You can use NADA to value your car. Using Federal exemptions, you can protect up to $3,225  in equity in your car. If you have more equity than that, you can use some of your wildcard exemption to protect more.

Virtually all of my clients get to keep their cars. However, if you have, lets say, a brand new 2010 Audi and it is paid for then get ready to turn over the keys to the Trustee. Most of my clients don’t have luxury sport cars but you get my point.

If your car is worth less than what you owe, then you need to make sure you want to keep it. Maybe it’s breaking down, has a really high interest rate or is worth much, much less than what you owe. In those cases, you may want to not keep the car. You can walk away from it and any deficiency will be discharged in your Chapter 7.

If you have a loan on your car and you still want it, you will have to sign a reaffirmation agreement. When you file for bankruptcy, any loan contracts you have signed are wiped out. This includes a car loan. A reaffirmation agreement reinstates the car loan. If after bankruptcy you default, the lender can repossess the car, auction it off, and sue you for any deficiency so make sure the car is worth that risk.

You can read more about exemptions, keeping your car, and Chapter 7 in my free e-book, The Bankruptcy Book.