Will I lose my vehicle in bankruptcy?

Next to their home, for many people their car is the most valuable thing they own. Naturally, it’s often top of mind when insolvent individuals — those whose debts outweigh their ability to repay them — consider declaring bankruptcy.

Will you lose your car in bankruptcy? There’s good news and bad news. The good news is you won’t be stranded. Once the value of your vehicle has been appraised for fair market value — that is, what you could likely sell it for to a stranger — if there are no liens on it, you’ll have the choice of either surrendering the car to your bankruptcy trustee or remitting to the trustee the value of the vehicle to be disbursed to your creditors. If your car is worth less than $5,650 and you don’t owe money on it, you’ll be permitted to keep it without further payment; if it’s worth more, you’ll remit the difference.

The potentially bad news is that if you do owe money on the car, i.e. there’s a lien on it so you don’t have “clear title,” it gets a little more complicated.

The lender who helped you buy the car will likely be able to prove to the trustee that they have first priority over any other claims on it, and your trustee will likely “release” the car to them; that is, acknowledge that they have the right to the car if you fail to make your payments. The lender will then be able to make arrangements with you to keep

making your regular payments, or seek payment of the fair market value if your loan is more than the car’s worth, or seize and sell the vehicle. If the difference between what you owe and the car’s value is significant, it may be in your best interest to simply surrender the car to the lender; the shortfall will then be added to your bankruptcy.

If the value of your vehicle is actually more than the remaining loan amount, instead of releasing your car to the lender, your trustee will determine the difference between the market value and what you owe, and you will pay that amount to the trustee as well keeping up your payments, or the trustee will seize and sell the car. Usually, you’ll be able to make arrangements to pay the difference over the course of your bankruptcy.

The rules about vehicles in bankruptcy can get confusing, so your best bet is to discuss your particular situation with your credit counsellor or bankruptcy trustee.

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