Your Car in Bankruptcy

For many residents of Tacoma, Washington, a car is essential for work, errands, and daily life. If you are facing financial difficulties and considering bankruptcy, you may wonder what will happen to your vehicle. Whether you’re filing for Chapter 7 or Chapter 13 bankruptcy, the outcome can vary depending on many factors.

It is advisable to consult an experienced Tacoma bankruptcy attorney who can help you determine the right course of action for your specific financial situation, since this can be a complicated process with complex laws.

Can You Keep Your Car in a Bankruptcy?

Whether you can keep your car or not depends on several different factors:

• Whether you are current on your car loan payments
• The amount of equity you have in the vehicle
• The bankruptcy exemptions available under Washington law
• Whether you file for Chapter 7 or Chapter 13 bankruptcy

Chapter 7 Bankruptcy and Your Car

Chapter 7 bankruptcy is designed to eliminate most of your unsecured debts, but it also requires that your non-exempt assets be liquidated to repay your creditors. Here is how this can affect your car:

• If you own your car outright and the equity is within Washington’s exemption limits, you can keep it.
• If you have a loan on your car, you need to continue making the payments to retain ownership.
• If you have too much equity, the bankruptcy trustee may sell your car to repay your creditors, unless you use an exemption to protect it.
• Reaffirmation agreements allow you to keep your car as long as you continue making the payments.

Washington State Vehicle Exemptions

When you file for bankruptcy in Washington, the law allows you to protect a certain amount of equity in your vehicle.

• RCW 6.15.010 provides an exemption of up to $3,250 in vehicle equity for a single filer.
• If you are married and file jointly, you might be able to double this exemption.

Chapter 13 Bankruptcy and Your Car

Chapter 13 bankruptcy in Tacoma allows you to reorganize your debt and turn it into a manageable monthly payment plan that you pay over three to five years.

This is a good option if:

• You are behind on your car payments and need to catch up
• Have a lot of equity in your car that surpasses the limits
• You want to lower your car payments through a cramdown

What Is a Loan Cramdown?

Under 11 U.S.C. § 506, a car loan cramdown lets you reduce the total amount you owe to match the car’s current value. However, you can only take advantage of this option if:

• Your car loan is over 910 days (about 2.5 years) old
• The vehicle is worth less than you owe on it

Relevant Washington State Laws and Statutes

Numerous laws govern the treatment of cars in bankruptcies in Tacoma and throughout Washington State.

• RCW 6.15.010: This defines Washington’s personal property exemptions, including the vehicle equity limits we described.
• 11 U.S.C. § 522(d)(2): This provides federal vehicle exemption limits you can use as alternatives to the state exemptions.
• 11 U.S.C. § 506: This talks about secured claims and allows cramdowns for Chapter 13 bankruptcy.
• 11 U.S.C. § 362: This establishes the automatic stay, which prevents repossession and other activities for the duration of your bankruptcy process.
• 11 U.S.C. § 521(a)(2): This says you need to declare your intention regarding your secured debts, like your car loans, in a Chapter 7 bankruptcy case.

Pierce County and Bankruptcy Filings

If you live in Tacoma or anywhere in Pierce County, your bankruptcy case is handled by the United States Bankruptcy Court for the Western District of Washington. The local rules and procedures in your area will influence how your case progresses.

For this reason, consulting an experienced Tacoma bankruptcy attorney is always highly recommended.

FAQs About Cars and Bankruptcy in Tacoma, Washington

One of the first questions most people have when considering bankruptcy is “what will happen to my car?” The answer to that question depends on your circumstances, but most people are happy to learn that they have nothing to worry about. Bankruptcy law is created to give people a financial fresh start. Depriving someone of a car is not much of a fresh start. The law recognizes that cars are essential for reorganizing your financial life, staying employed, and moving forward.

There are two primary concerns in bankruptcy as far as your car is concerned: what is its value and is there a lien on it. A lien is a security interest on the car to guarantee payment of a car loan. The value to you (and potentially your creditors in bankruptcy) is the car’s equity or its value minus the balance of any loan secured by a lien.

As far as the car’s value is concerned, you are protected from having the car liquidated in a Chapter 7 by exemptions. There is a specific car exemption under both state and federal law, around $3400 for each. You can stack the wildcard exemption on top of the car exemption as well. The wildcard exemption under state law is $3,000 and federal law is $11,975. Again, the only value you have to worry about is the equity in the car. If for some reason you can not protect the car with exemptions, you can file a Chapter 13 and pay the non-exemptible equity that would have gone to creditors through a sale of the car in payments through a Chapter 13 plan. You just have to pay what the creditors would have received through the sale in monthly payments up to a five years. In a Chapter 7, you can often offer the trustee some cash in lieu of a sale of the car. That way the trustee can avoid having to sell the car and may accept a little less. Of course, you have to have some way of coming up with the cash.

If you are making payments on the car and you filed a Chapter 7, you have three options. You can surrender the car and walk away from the loan. You can reaffirm the debt. A reaffirmation takes the car loan out of the bankruptcy so you should be careful about signing that. The third option is a redemption, where you pay off the loan at the value of the car. Some finance companies specialize in loaning money to people in Chapter 7 for a redemption. Of course, redemptions only work if the car is worth significantly less than the loan balance.

In a Chapter 13, you can pay off a car loan over five years. You can also cram down the car loan if the car was purchased over two and a half years ago or if the loan is “non-purchase money security” such as title loan or refinance. A cram down is the ability to pay the value of the car to the creditor and pay pennies on the dollar for any amount of the loan that exceeds the car’s value. You can also surrender the car in a Chapter 13.

Have any questions about your car in bankruptcy? Contact the trusted bankruptcy lawyers in Tacoma, Washington.