How to File for Chapter 7 Bankruptcy without Losing Your Vehicle

It’s often assumed that Chapter 7 bankruptcy results in all of one’s possessions being liquidated. Fortunately, however, this is not always the case. Below is an overview of some of the ways in which a debtor may keep his or her vehicle when filing for Chapter 7 bankruptcy.

Free and Clear Vehicles

When a vehicle in a bankruptcy case is owned free and clear, the value of the vehicle becomes the property of the bankruptcy estate. However, in order to protect some types of property from liquidation by the Chapter 7 trustee, bankruptcy law allows debtors to exempt certain items from the estate. Both federal and state exemptions allow debtors to protect a certain amount of value in a personal vehicle, and when a debtor is able to exempt the entire amount of his or her vehicle, the trustee will refrain from liquidating the same. In addition, when substantial nonexempt equity remains in a vehicle, the debtor can choose to turn the vehicle over to the trustee, who will then sell it and pay for the exemption, or he or she can pay the trustee the nonexempt equity and keep the vehicle.

Vehicles with Loans

When a Chapter 7 debtor still owes money on a vehicle, he or she has the option of keeping the vehicle via reaffirmation of the debt. When a debt is reaffirmed, the debtor signs a contract (reaffirmation agreement) with the creditor agreeing to continue making payments in exchange for maintaining possession of the vehicle. When a reaffirmation agreement is signed and a Chapter 7 discharge is obtained, the debtor remains bound by the agreement and liable for the debt. For this reason, it is usually necessary to demonstrate to the court both a need for the vehicle and that the accompanying payment will not result in an undue hardship to the debtor.  Otherwise, the court will disapprove of the reaffirmation agreement, and the creditor will take possession of the vehicle. A second way in which a vehicle for which money is still owed may be retained is known as redemption. With redemption, the debtor offers to pay the car lender the market value of the vehicle in a lump sum. Upon approval by the court, the debtor then retains the vehicle.

New York Legal Representation

Chapter 7 bankruptcy allows debtors to wipe their financial slates clean. However, it can sometimes be difficult to determine which property must be liquidated and which items may be retained. Therefore, if you are considering filing for bankruptcy in New York, we recommend that you contact a bankruptcy attorney to discuss your unique situation. An experienced New York Chapter 7 bankruptcy attorney will keep you apprised of your rights while ensuring that you understand all of your debt relief options. Please contact us for a free consultation.