When debt exceeds the debtor’s ability to pay, bankruptcy is an option. There are two kinds of bankruptcy: Chapter 7 bankruptcy, in which debts are erased or cancelled, and Chapter 13 bankruptcy, in which the debtor is given a grace period to reorganize finances and pay back debts at settlements or lowered payments.
Both kinds of bankruptcy affect car ownership, but you may be able to keep your car in both kinds of bankruptcy, depending on the circumstances of the filing.
Do You Lose Your Car Title in Bankruptcy?
The car title is the piece of paper that declares ownership of the car. If a lien is placed on your car because of debt, the title is taken until the lien is satisfied. Paying off the lien will restore title and full ownership.
In Chapter 13 bankruptcy, you keep your possessions. Chapter 13 bankruptcy courts help you manage payments on your debts. Even if you are behind on payments or your loan, you can either reduce the car loan to match the car’s value, or you can pay back old payments through the bankruptcy repayment arrangements.
Chapter 7 bankruptcy is a little more complicated when it comes to personal property. Because Chapter 7 bankruptcy erases debts, you must disclose all personal assets and property during the bankruptcy process. Usually, property such as vehicles can be seized to repay debts. However, automobiles are often give an exemption during bankruptcy. That means that the bankruptcy court will set aside a certain amount of equity in your car. If the amount of equity set aside is equal to the value of the car, then you can keep the car outright.
The amount of equity set aside will differ based on state law. The car’s “blue book” value is generally the legal standard by which to judge the car’s worth. If you own the car completely, and don’t make any payments on it, the equity is the full value of the car’s worth. If you are paying back a loan, the amount of equity is equal to the amount you would have left over if you sold the car and paid back the loan.
Do I Need a Lawyer?
Yes. Both kinds of bankruptcy require legal counsel and representation. There are fees to file that can be substantial, so it is in the best interest of the filer to have the best possible attorney to advise on how to present the best bankruptcy case. A bankruptcy attorney can help you keep possessions while paying back or discharging outstanding debts.