What appears to be a simple question can become complicated depending on the circumstances of your case. The following endeavors to help answer this question.
Chapter 7 Bankruptcy
What most people have in mind when they think of Bankruptcy is actually a Chapter 7 Bankruptcy. A Chapter 7 Bankruptcy is a liquidation of one’s unprotected assets to pay creditors.
Fair Market Value of Car
- The starting point is the value of your car. How much is your car worth? The value employed in Bankruptcy Court is ordinarily the Kelly Blue Book Third Party Value. So do not look at the trade-in or retail values.
Sometimes the KBB Third Party Value does not accurately reflect your car’s value when there has been damage. In that case, you should get an appraisal from a car dealer. Alternatively, you should get an estimate for the repairs needed to fix the damage to your car.
Equity in Car
- Next, is there a lien encumbering your car? Do you have an auto loan? How much do you owe on the auto loan? Subtract the auto loan balance from the car value. The resulting figure, if any, is the equity in the car.
Example: Car is worth $11,000. The auto loan balance is $10,000. The resulting equity in the car is $1,000.
If your car is paid-off (no auto loan), then the equity calculation is very simple. The equity is the value of the car.
2nd Example: Car is worth $11,000. There is no auto loan on the car. The resulting equity in the car is $11,000.
Exemptions available to Protect Car Equity
- Lastly, is the car equity within your allowable exemptions? If you have lived in Florida for the last two years, then you must use Florida exemptions.
If you did not reside in any one State during the two years prior to filing bankruptcy, then you use the exemptions of the State you lived in for the majority of the 180-day period immediately preceeding the two-year period. However, some States require that you reside in the State at the time you file the Bankruptcy case. So if you did not reside in one State during the two-year period and cannot claim the exemptions of the State you resided in for the majority of the 180-day period (because you do not currently live in that State), then you may claim Federal exemptions. 11 U.S.C. §522(b)(3).
The Florida car exemption is $1,000. Fla. Stat. Ann. § 222.25(1).
You may also use the Florida Personal Property exemption on the car. The Personal Property exemption is another $1,000. Fla. Const., Art. X, §4(a)(2).
Lastly, you may use the Florida Wildcard exemption. The Wildcard exemption is $4,000. Fla. Stat. Ann. § 222.25. Please note that you may only use the Wildcard exemption if you did not use the Homestead exemption.
Example: Car is worth $11,000. The auto loan is $10,000. There is no equity in the car after claiming the $1,000 Florida car exemption.
2nd Example: Car is worth $11,000. There is no auto loan. There is $5,000 of equity in the car after claiming the $1,000 Florida car exemption, $1,000 Florida Personal Property exemption, and $4,000 Florida Wildcard exemption.
Unprotected Equity in Car
- So what happens when there is unprotected equity in the car like in the second example above? In that case, the Bankruptcy Trustee can sell the car. The Trustee will pay you any exemption claimed from the sale proceeds ($6,000 in the 2nd Example above), then she will disburse the rest to creditors less her commission and costs ($5,000 in the 2nd Example above).
You may buy back the unprotected equity in the car from the Bankruptcy Trustee so that you may retain the car. However, the buyback amount must be paid lump sum. This option may or may not be feasible depending on the amount of the unprotected equity in the car. In the 2nd Example above, you would have to pay $5,000 lump sum to the Trustee in order to retain the car.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is a repayment plan through the Bankruptcy Court for a period of no less than 3 years and no more than 5 years. Chapter 13 Bankruptcy is not a liquidation of your assets. So you may file a Chapter 13 Bankruptcy in order to retain an asset you would otherwise lose in a Chapter 7 Bankruptcy. However, your creditors in Chapter 13 must receive at least what they would receive in Chapter 7. If there is unprotected equity in the car, then creditors in Chapter 13 must receive an equivalent amount over the course of the plan payments.
- Example: The car is worth $20,000. There is no auto loan. The equity in the car is $14,000 after accounting for all available exemptions. The Chapter 13 Plan must pay a pro rata share of $14,000 in unprotected equity to your unsecured creditors. If your unsecured creditors total $35,000, then that amounts to a 40% dividend to unsecured creditors. If your unsecured creditors total $10,000, then that amounts to a 100% dividend to unsecured creditors.
Conclusion
Your transportation is very important. You should contact an experience bankruptcy attorney if you are considering filing a bankruptcy case. The Law Office of Brent M. Myer, PLLC offers free consultations. Call today for your free consultation!
