Probably the most often asked question when it comes to filing for bankruptcy is if you can keep your car. While the answer to that question depends on , sometimes the issue is the complete opposite and the question is whether you can sell your car during bankruptcy. Continue reading to learn what to expect if you’re considering selling your car during a Chapter 7 or Chapter 13 bankruptcy.
Selling your car during Chapter 7 bankruptcy
Because your car is an , meaning it has a value, the first issue to consider if you’re selling your car during a Chapter 7 bankruptcy, is to find out if your car has equity. is defined as the value of your car minus what you owe. For example, if your car is worth $10,000 and it's a loan of $3,000, the equity is $7,000. If there’s equity in your car, then the next step is to figure out how much of the equity is protected by . Continuing with the example above, if the bankruptcy exemption in your state is $1,000 for a car, then you would subtract the $1,000 from the $7,000. The difference of $6,000 is the amount your creditors are entitled to. Assuming the can sell your car for $10,000, you would receive the exempt amount, in this example the $1,000, and $3,000 will be used to pay off your car loan. The remaining $6,000 belongs to the and that money will be used to pay your .
The process is simple and straightforward with a Chapter 7 bankruptcy. While the process and the result are almost the same with a Chapter 13, there are differences you should be aware of. Continue reading to learn about selling your car during a Chapter 13 bankruptcy.
Selling your car during a Chapter 13 bankruptcy
In the example above, we reviewed how to sell your car during a Chapter 7 bankruptcy. But can you sell your car during your Chapter 13? You can, but there are some when compared to a Chapter 7 bankruptcy.
Whether it’s a Chapter 7 bankruptcy or Chapter 13, both types of bankruptcy offer exemptions for your car, as well as for personal and real property. However, with a , you can keep property that is nonexempt so long as you can afford to pay for it. This involves a 36 to 60-month payment plan with the bankruptcy court. The Chapter 13 payment plan is not to be confused with the payment plan in a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, the trustee sometimes allows for a payment plan on the value of the nonexempt property for a period of 10 to 12 months, while other trustees may reduce the value of the nonexempt property in exchange for a lump-sum payment.
Just like a Chapter 7, with a Chapter 13 bankruptcy, you also need the approval of the trustee to sell your car. Depending on the local bankruptcy rules in your district, you may also need court approval. But, as long as the trustee agrees, this usually won’t be an issue. However, the difference between both types of bankruptcies is that with a Chapter 13, selling your car may affect how much your Chapter 13 payment plan will be.
If your monthly car payment is $200 per month, if you sell your car, you will have $200 more per month available in disposable income. The bankruptcy trustee would require that the extra $200 be paid into your bankruptcy plan. The result is the same if you sell your car intending to get another car with a lower monthly payment. For example, if your new car payment is $150 per month, the trustee would want $50 added towards the bankruptcy payment plan. If your monthly car payment is going to be higher, the bankruptcy trustee may object and the court may not allow you to incur this new debt, as it will result in less money going to your creditors. If you’re selling your car but aren’t planning on buying another one, then the trustee will keep any amount over the exempt amount and just like the Chapter 7 example and disburse the money to your creditors.
Talk to your trustee
To determine how to handle the sale of your car, contact the trustee's office. The trustee will tell you whether they will object or not. Depending on the facts of your case, the bankruptcy trustee may be involved in the sale of your car which is usually done by selling your car at an auction. If you happen to have a buyer for your car, you will be required to hand over any money from the sale to the trustee. The exempt amount will be returned to you, and the rest of the money will be used to pay off your debts. While you will be communicating with the trustee’s office about the sale of the car, remember the trustee is not your attorney and will not offer you legal advice.
If you are considering filing for , Upsolve is here to help. Our bankruptcy web app is for those that qualify. Review the hundreds of articles on our website and find out which debt relief option is best for you. If you need to consult with an concerning bankruptcy, we can also refer you to an attorney for a free consultation.