Besides the house, Debtors are most concerned about what is going to happen to their vehicle. The Bankruptcy Alphabet has touched on some aspects of how vehicles are treated in bankruptcy, but we will organize it all in one place.
V is for Vehicle
We’ll discuss the difference in the way vehicles are treated in each chapter of consumer bankruptcy.
Chapter 7 Liquidation
Vehicles are property of the bankruptcy estate and will be liquidated if there is sufficient equity and no qualifying exemptions to protect it. Normally vehicles that have a lien against it from a bank will not have equity and in fact, may be upside-down, thus will not be valuable to the bankruptcy trustee for liquidation.
If the vehicle does have equity (value is worth more than what is owed against the vehicle), then a Debtor will need exemptions to protect it. We learned previously in the Bankruptcy Alphabet about exemptions. If the debtor is employed, he is entitled to use up to $2,400.00 to exempt a vehicle used for transporting to work. Additionally, up to $2,500.00 of the “Wild Card” exemption can be used to exempt a vehicle.
There are circumstances where a lien on a vehicle could be avoided by the bankruptcy judge. In order to qualify, the creditor must hold a non-purchase money security interest in the vehicle. Most vehicles are purchased from a dealer and are financed by a bank. This is called a purchase money security because the security interest was created when the vehicle was purchased. In order to void, the security interest held by a creditor must be a non-purchase security interest, or the owned vehicle is put up as collateral for a subsequent loan. In order to get the loan, the Debtor was required to put his vehicle up as collateral. The second requirement is that the lien must be a burden on debtor’s exemptions. This portion requires a good deal of analyzing and would be impossible to flesh out here. A debtor should review with their attorney whether they may be able to avoid a lien on their vehicle.
Chapter 13 Reorganization
Vehicles are treated differently in Chapter 13 cases. One reason is that vehicles are not liquidated. The bankruptcy code treats vehicles with liens in two different ways: those purchased within 910 days and those owned for longer.
If the debtor purchased a vehicle within 910 days before filing the bankruptcy petition, the Bankruptcy Code, as applied in Nebraska, requires that the debtor propose to pay the vehicle loan in its entirety through the Chapter 13 Plan. The debtor is permitted to modify the loan’s interest rate as applicable in In re Till.
If the debtor has owned the vehicle for more than 910 days, the debtor is allowed to propose paying the vehicle’s fair market value on the day of filing in the Chapter 13 Plan. Once again, the loan’s interest rate may be modified accordingly. This is a valuable tool in cases where the value of the vehicle is significantly less than what is owed. The creditor can object to the plan that proposes paying the fair market value. This causes the Bankruptcy Court to schedule a hearing. A debtor may be required to get an appraisal of the vehicle to determine its value. A debtor should review with his attorney when his vehicle may have been owned for more than 910 days to determine whether paying the fair market value would be in the debtor’s interest. It is important to select a knowledgeable bankruptcy attorney because most bankruptcy mills will simply file your case immediately without determining whether it would be best to wait a short while to benefit from the bankruptcy code provisions.
As one can see, for the most part, vehicles are usually safe in a bankruptcy case, but it requires a competent bankruptcy attorney to review the situation.
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