Denver bankruptcy attorneys The Wink Law Firm can help you keep your car and other assets
The word “bankruptcy” can conjure up scary images of financial ruin. You might imagine creditors swarming in and taking your house, car, and other possessions, leaving you with nothing.
Luckily, that’s almost never the case.
In fact, the government allows for you to keep several possessions in order to achieve a fresh start after bankruptcy.
After all, if filing for bankruptcy meant you were now living on the streets with zero possessions and $0.00 in your bank account, then it wouldn’t be a particularly reasonable option for people in desperate need of debt relief.
What Happens to Your Car in Bankruptcy?
While there are some assets that creditors can take during bankruptcy, there are some they can’t, which are known as “exempt” assets.
One example is your car.
However, the car you’re allowed to keep may not be your current car. Or if you more than two cars, you may not be able to keep all of them.
State law dictates how much equity is exempt when filing for bankruptcy. Since Colorado passed a sweeping expansion of its exemption laws in 2022 (Senate Bill 022-085), you are now allowed up to $15,000 in equity for up to two vehicles pursuant to amended Colorado Revised Statute § 13-54-102(j). If you or a dependent family member is 60 years of age or disabled, the amount increases to $25,000. If you file jointly for bankruptcy with your spouse, you both get your own vehicle exemption.
The formula to determine equity is: current value of the vehicle LESS the amount you owe on it. If your equity in the vehicle is greater than the exemption limit in your state, you may still want to file for bankruptcy. A bankruptcy attorney can probably help you plan to keep the value of the equity in your vehicle while also getting the benefits of bankruptcy.
So let’s look at some examples:
- Let’s say the current value of your car is $10,000, and you still owe $7,000 on it. That means your equity is $3,000 ($10,000 – $7,000). $3,000 falls below the $15,000 equity limit, meaning you should be able to keep your car.
- Let’s again say the current value of your car is $20,000, but this time you only still owe $2,000. That means you have $18,000 in equity. Unless you or a dependent is 60 or older or disabled, your equity exceeds the exempt limit of $15,000. Talk with respected bankruptcy law firm The Wink Law Firm to determine if you’re still able to keep your car.
Additionally, if you owe on your car, bankruptcy generally does not remove the lien on your vehicle associated with this debt. This means that you will have to make car payments in order to keep the vehicle through bankruptcy.
However, if your car is currently worth less than you owe on it, bankruptcy may reduce the value of the lien on your car to its fair market value. This can effectively reduce what you owe to the car’s fair market value.
Can You Afford Your Car?
From a practical perspective, you should consider whether you can afford your current car when entering bankruptcy. This is because bankruptcy often represents an opportunity to walk away from a bad car deal with little or no liability.
It can be hard to part with your dream car. But if it’s causing you unnecessary financial hardships, it may be time to walk away.
However, this doesn’t mean your only option is now public transit or hitching rides. For many people, a car is a basic necessity. But that doesn’t mean you need to own an unaffordable car.
If you can’t afford your current car deal, consider the following options when preparing for bankruptcy.
- Buy a used vehicle with whatever money you can scrape together. Truthfully, this is probably your best financial option. While the specter of driving an inexpensive car that’s not in great shape may not be as appealing, it may be the smart choice until you can get your financial life back on track.
- Buy a used vehicle with a loan. If you have a job, you can probably get a loan even though you are filing for bankruptcy. The loan may come after you file or after your discharge, in which case you will need to make payments on your old vehicle or use public transportation until you have the new loan. Regardless, you can expect to pay 18% to 21% interest. This is why a less expensive car with no loan is a better deal. Still, if you have a monthly payment you can afford with a high interest rate, you’re better off than you were before.
- Consider your bankruptcy rights. If you owe more on your current car than it is worth, you may be able to effectively get the balance you owe on the vehicle down to its current market value. This may make the vehicle more affordable.
- Chapter 7 bankruptcy: In Chapter 7 bankruptcy, you can do this through your right of “redemption,” which enables you to buy the car from the lender for what it’s worth today rather than what you owe. You’ll need a lump sum to do this, but there are lenders who will loan this money in certain cases. Unfortunately, these lenders may charge high rates, often 21% to 24% interest. Because of this, this deal only makes sense if the car is worth substantially less than you owe.
- Chapter 13 cram down: In Chapter 13 bankruptcy, you can reduce the amount of the lien on your car to the amount of its current value without having to take out a new loan IF you have owned the vehicle for at least 2.5 years. This is known as a “cram down” and can be very beneficial.
A good bankruptcy lawyer like The Wink Law Firm should be able to put you in touch with lenders and help you evaluate these options. First and foremost, the best deal is one that you can afford.
Keeping Your Car in Bankruptcy
Don’t let your love of that depreciating car keep you from making smart financial decisions. Instead, know that bankruptcy will let you have a vehicle of some sort and work toward getting a fresh financial start.
Get started learning what assets you can keep during bankruptcy by contacting Denver bankruptcy attorneys The Wink Law Firm. They’ll review your specific case and help you get back on the road to financial wellness. Call The Wink Law Firm today at (720) 523-0620, or contact us online to begin learning how you may keep your car if you file for bankruptcy.