If you've filed for chapter 7 bankruptcy or are thinking about it, you may want to know what your options are around keeping or buying a vehicle. This article will provide you with information around the most common issues – like buying a car before filing, whether you can keep your car, how to protect your car, how long you have to wait after filing to purchase a vehicle, and how to protect your existing car from being taken.
Chapter 7 Bankruptcy Process
When you file for chapter 7 bankruptcy, it will take 3-4 months to complete the process. During that time, creditors must put your accounts on hold, meaning they can't continue to try to collect on your debts. This also means you cannot acquire new debt without it being subject to the bankruptcy proceedings. Most lenders don't want to take this risk, so acquiring new debt once you've filed for chapter 7 is nearly impossible. Once a meeting of your creditors has taken place (341 meeting), you won't be able to add any new debts to your bankruptcy petition. This allows you to then apply for new debt without any risk to creditors. In most cases, you'll be looking at applications through sub-prime lenders.
Should I buy a car before filing for bankruptcy?
Because you won't be able to protect your cash after filing for chapter 7, it may be in your best interest to purchase a car before filing. Since most states have a motor vehicle exemption which allows you to maintain a certain amount of equity in your car, buying a car before your bankruptcy can be a good choice, especially if you don't have one. Just keep in mind that you'll have to explain the purchase to the court, and if you buy an expensive vehicle, the courts could force you to sell it and buy a less expensive one.
Can I buy a car during chapter 7?
While you can buy a car during chapter 7 bankruptcy, you probably don't want to. First, most lenders will be reluctant to approve you for an auto loan during bankruptcy. However, you may be able to purchase a car by putting down a larger down payment and paying a very high interest rate. Another option for buying a car during bankruptcy is to pay cash. In either situation, keep in mind that you'll have to explain to the bankruptcy court why you purchased a vehicle.
Although most states allow for a certain amount of equity in a car to be protected under a motor vehicle exemption, if you purchase a luxury vehicle during bankruptcy, there is nothing stopping the court from forcing you to sell an expensive vehicle in order for you to pay creditors.
Tips for keeping car in chapter 7 bankruptcy
Most people want to know if they'll have to surrender their car or if they'll be able to keep it during a chapter 7 bankruptcy.
Will you have to surrender your car?
If your automobile falls within the appropriate exemption limit for your state, it is unlikely that you'll have to surrender you car in order to pay your creditors. Also, if you have zero equity, or negative equity, the court is unlikely to try to sell your vehicle since there will be nothing to gain from it.
Can I keep my car?
Property that is exempt under Chapter 7 bankruptcy rules means you get to keep it. Exempt property usually includes things like clothing and furniture, but in many states, it also includes your car or some portion of equity you have in your car. Understanding the guidelines of your state will help you understand if you can keep your car after filing for chapter 7.
Wild card exemptions could protect your car
If the equity in your car isn't covered by your state's motor vehicle exemption, you may be able to use what's called a wild card exemption to keep your car in your possession. Not all states have one, so you'll want to see if your state has a wild card exemption, and how much it is.
Homestead exemptions could protect your car
Some states may allow you to use some of your homestead exemption to protect your car by applying the unused portion of your homestead exemption to other assets, like your vehicle.
How long do I have to wait after chapter 7 to buy a car?
If you're wondering if you can buy a car after chapter 7 bankruptcy, the answer is yes. But you may have to wait a few months.
Approximately 60 days after your 341 meeting, your bankruptcy will be discharged. At that time, your previous debts are expunged and you may begin to apply for credit, including an auto loan.
How to buy a car after chapter 7 discharge
Because of your bankruptcy filing, you'll likely need to apply for an auto loan with a sub-prime lenders or visit a buy here, pay here car lot, where you may drive off the lot for a few hundred dollars down on a car. Just be prepared to pay more. Bad credit auto loans usually have a high interest rate. Each state sets its own limits on how much interest you may legally be charged, but in some cases, it could be as much as 18 percent, and in some states, there is no limit.
Purchasing a used car, truck, or SUV will help you save money after a bankruptcy. Late model vehicles have a lower price tag and interest rate, and are generally cheaper to insure. A used car loan is likely to have a lower rate too.
How Much Equity Do I Have in My Car?
Being able to purchase a vehicle or keep a vehicle before, during, or after chapter 7 bankruptcy depends on how much equity you have in your car. How much equity do you have? Here's how to find out:
If you own your car outright, the value of your car is equal to the equity you have in the car. For example, if your vehicle is worth $3,500, your equity is $3,500.
On the other hand, if you have a car loan, your equity is equal to the amount of money you'd have if you sold the car and paid off the loan. For example, if you owed $7,500 on your car, and sold it for $8,500, then your equity is $1,000. If you owe what the car is worth, you have zero equity, and if you owe more than the vehicle is worth, you have negative equity. In either of those two cases, it is unlikely your car will be taken from you during a chapter 7 bankruptcy because creditors want to liquidate assets that are worth money in order to get back the money you owe them. Since no money can be received from a car with zero or negative equity, most bankruptcy courts won't go through the effort of seizing and liquidating such a vehicle.