Last updated July 31, 2018.
When considering bankruptcy, many people are especially concerned about what will happen to two assets: their home and their car. In Nevada, both of those assets are usually exempt, meaning that you can usually keep them even if you go through bankruptcy. But some complications can arise when either of them is subject to a lien—like a mortgage on the house or a car loan.
Today’s post focuses on the latter. To help you understand how bankruptcy may affect your automobile, we’ve compiled a list of four frequently asked questions about cars, bankruptcy, and repossession.
Can I Keep My Car in Bankruptcy?
It depends. If your car qualifies for a bankruptcy exemption, then the trustee cannot sell it to pay off your debts in a Chapter 7 bankruptcy. But, because the bankruptcy discharge only releases you from further liability on unsecured debts, you may not be able to keep your car if you owe money on it and won’t be able to afford the payments even after bankruptcy.
Nevada law exempts the first $15,000 in equity in a motor vehicle. (If the vehicle is specially equipped for a person with a disability, then it is exempt regardless of equity.) Equity is the difference between the car’s value and what you owe on it. So, if your car is worth less than $15,000 (or your equity is lower than $15,000), then it can be exempted.
But an exemption only prevents the bankruptcy trustee from selling your car in a Chapter 7 bankruptcy. (In a Chapter 13 bankruptcy, exemptions limit what assets are considered as you develop a repayment plan.) If you owe money on your car, that debt is secured by the car itself, and secured debts like that are not discharged in bankruptcy.
So, you have to choose: If you want to keep your car through bankruptcy and you still owe on it, you will have to reaffirm your obligation and continue making payments. If you either don’t want to keep your car, don’t want to keep paying on your car loan, or can’t pay down your loan even after bankruptcy, you’ll have to surrender the car to your lender.
In some cases, it may be in your best interest to surrender your vehicle back to the bank shortly after your bankruptcy filing. Otherwise, you will be responsible for safeguarding the vehicle, which means insurance, maintenance, and otherwise protecting the vehicle from harm or damage. Damage to the vehicle after you file bankruptcy could expose you to liability that is not included in your bankruptcy discharge.
Can My Lender Repossess My Car During My Bankruptcy Case?
To understand the answer to this question, recognize that the automatic stay protects a bankruptcy debtor from any collection action. Until the creditor is otherwise authorized, it cannot take the vehicle during a bankruptcy case.
The Bankruptcy Code describes three circumstances in which a debtor will lose the protection of the automatic stay for property subject to a loan. Each bankruptcy debtor is required to file a statement of intention with the court that announces the debtor’s intent to surrender, redeem, or reaffirm property secured by a lien.
If the debtor fails to file the statement of intention within 30 days after filing for bankruptcy (or by the date of the section 341 meeting of creditors, whichever is earlier), the automatic stay is lifted.
The automatic stay also terminates for secured property if the debtor fails to follow through with his or her intention to surrender, redeem, or reaffirm within 30 days after the first date set for the section 341 creditors’ meeting.
But just because the automatic stay is lifted and the collateral is no longer property of the bankruptcy estate does not mean that a creditor can immediately repossess the collateral. Repossession can only occur if the debtor is in default under the terms of the loan agreement.
Finally, the automatic stay is terminated when the debtor receives a bankruptcy discharge. In this case the debtor’s personal liability is discharged, but he or she still has possession of the secured collateral. If the debtor is in default for not making payments on the loan, the creditor can immediately repossess the vehicle.
What Happens if I Surrender My Car in Bankruptcy?
Surrendering property in bankruptcy is usually a simple matter. Your attorney and the bank coordinate a time and place, and you drop off the car. In some cases the lender may send a person or tow truck to get the car. Nearly always the debtor is given advance notice. If you have specific questions about how a surrender will take place in your case, speak to your bankruptcy attorney.
How Can Filing Bankruptcy Help Get My Car Back?
If your vehicle has been repossessed, you may be able to get it back by filing bankruptcy, if you move quickly.
Section 542 of the Bankruptcy Code requires that entities in possession of “property of the bankruptcy estate” are generally required to turn the property over to either the trustee (in Chapter 7) or the debtor (in Chapter 13). Section 541 of the Bankruptcy Code defines property of the estate as “all legal or equitable interests of the debtor in possession as of the commencement of the case.”
A debtor often has an ongoing interest in a repossessed vehicle under state law, making even a repossessed car “property of the bankruptcy estate.” But in many states, these rights are only available to the debtor for a few days or weeks after the repossession (although sometimes continuing until the creditor sells the vehicle or otherwise transfers title).
If your vehicle is property of the bankruptcy estate, most courts say that the creditor must return the vehicle to the estate immediately upon learning of the bankruptcy filing. If the creditor refuses or otherwise fails to do so, the bankruptcy court may sanction the creditor.
Still Have Questions?
If you are considering bankruptcy and are worried about your car, or if your car has been repossessed and you want to learn more about how bankruptcy can help you get it back, you should speak to a knowledgeable Las Vegas bankruptcy attorney from Haines & Krieger. We offer a free consultation to help you understand whether bankruptcy is right for you. Contact us today.