One of the most common concerns debtors have when considering filing for bankruptcy is whether they are able to keep a car. For many New Yorkers, a vehicle is essential for getting to work, transporting family members, attending medical appointments, and managing everyday responsibilities. Due to a good amount of misinformation online, some debtors think they could lose all their possessions if they file for bankruptcy. This is not true.
The good news is that most people who file for bankruptcy in New York are able to keep their car (and their other possessions). Bankruptcy law contains protections called exemptions that allow debtors to keep certain property. This is mainly a concern in Chapter 7 bankruptcy, which is technically a liquidation in contrast with Chapter 13 bankruptcy which is more of a reorganization and provides a payment plan to pay at least some of the debt back (at least enough to cover the value of any non-exempt assets).
Understanding the New York Motor Vehicle Exemption
Bankruptcy exemptions exist to protect certain property from being sold to pay the debts included in a bankruptcy case. These laws recognize that individuals may need basic assets, such as a vehicle, to maintain employment and rebuild their financial lives. The key issue when it comes to vehicles is how exemptions apply to your car’s equity. Equity is the difference between what your car is worth and what you still owe on it. Determining equity first requires that determine the value of your vehicle. This can involve resources like Kelley Blue Book (KBB) or National Automobile Dealers Association (NADA) estimates or, in some cases, a professional appraisal. Next, if there is a loan on the vehicle, then the loan balance is subtracted from the value of the vehicle, resulting in the amount of equity.
For example:
- If your car is worth $12,000 and you owe $10,000 on the loan, your equity is $2,000.
- If your car is worth $8,000 and you owe $9,000, you have no equity.
- If your car is worth $5,000 and you do not have a loan, your equity is $5,000.
Debtors filing for bankruptcy in New York can choose between either New York State or Federal exemptions. Each system includes a vehicle exemption that protects equity in a car:
- Using Federal bankruptcy exemptions allows a debtor to protect up to $5,025 of equity in a vehicle. See 11 USC § 522(d)(2). In addition, a debtor can apply the federal wildcard exemption to any property they own, including a vehicle. Currently, the wildcard limit is $1,675 plus $15,800 of any unused portion of a homestead exemption. See 11 USC § 522(d)(5). Combining the full wildcard and vehicle exemptions allows a debtor to protect up to $22,500 in a vehicle. (Although a debtor may want to use some of the wildcard exemption on other non-protected assets.)
- Using New York State exemptions, allows a debtor to protect up to $5,500 of equity in one car or up to $13,625 if the vehicle is equipped for use by a disabled debtor. See CPLR §§ 5205 (a)(8).
Please note, many debtors filing for bankruptcy are either financing or leasing a car or have older vehicles that are owned outright. Typically, these vehicles will be 100% protected by bankruptcy exemptions in a Chapter 7 bankruptcy case.
Choosing Between New York and Federal Exemptions
When filing for bankruptcy in New York, a debtor must choose either the New York State exemption system or the federal exemption system. A debtor cannot mix and match between the two. The set of exemptions a debtor should claim is based upon the assets of debtor. One of the most important factors in this analysis is home equity. The New York homestead exemption is significantly larger than the federal homestead exemption, which often makes the state system more beneficial for homeowners. Additionally, only one car can be protected by the New York State exemption, unless a debtor is filing jointly with a spouse in which case they can claim exemptions for two separately owned vehicles.
What If My Car’s Equity Exceeds the Exemption Limit?
If a debtor’s vehicle’s equity is higher than the exemption amount, it does not automatically mean the vehicle will be taken. In a Chapter 7 bankruptcy case, a trustee evaluates whether selling the asset would produce a meaningful benefit to creditors.
Several factors are considered, including:
- The value of the vehicle
- The amount of the exemption
- Costs associated with selling the vehicle (auction fees, towing, storage, administrative costs)
Due to the cost-of-sale considerations, modest amounts of non-exempt equity may not justify liquidation. In some situations, it may also be possible to negotiate an equity buyout with the trustee. This allows the debtor to pay the non-exempt portion, often over three to six months, in order to keep the vehicle. Each case depends on the specific numbers involved, which is why an individualized analysis is important.
Some Common Scenarios Regarding Vehicle Owners Filing for Bankruptcy
Many bankruptcy filers fall into one of the following situations:
- Their car is fully paid off – if the vehicle is paid in full, the primary issue will be how much it is worth and whether that value fits within the available exemption.
- Their car has little or no equity due to a high loan balance – this is extremely common. If the loan balance is close to the vehicle’s value, the equity may be minimal, making the car easy to protect. Many car loans are even underwater (the loan balance is higher than the car value).
- The vehicle has a low value – older vehicles often fall well within exemption limits.
- They have a leased or financed vehicle – as mentioned above, many debtors are leasing or financing their cars. Since the loan value reduces a debtor’s equity, most financed cars are protected by bankruptcy exemptions. Additionally, if a debtor wishes to retain their vehicle and it is either leased or financed, then they must continue to make their payments during and after their bankruptcy. If payments stop, the lender may still have the right to repossess the vehicle. However, any deficiency owed to the lender is discharged by the bankruptcy provided the debtor does not reaffirm the debt.
Key Takeaways
- Most people who file bankruptcy in New York can keep their car.
- The central issue is equity in the vehicle.
- Bankruptcy exemptions protect equity up to certain limits.
- Every case is unique and should be reviewed based on the specific facts.
Contact the Law Offices of David I. Pankin, PC
If you are considering bankruptcy and are concerned about keeping your car, speaking with an experienced bankruptcy attorney can help you understand your options. The Law Offices of David I. Pankin, PC helps individuals throughout New York evaluate whether bankruptcy is the right solution and how exemptions can protect important assets like vehicles. Contact our office today at (888) 529-9600 or by using our online contact form to schedule a consultation and learn how bankruptcy can help you get a fresh fina
