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Can I Keep My Car in a Chapter 7 Bankruptcy Case When There is a Lien on It?

The attorney who handles your case should verify that the lien on your vehicle was properly recorded under the applicable state law, so that it is a valid publicly noticed lien. This is usually not a problem for the major auto lenders and major banks and credit unions. It may become a problem if you bought your car and financed it at a local 'buy here, pay here" type business. It is more likely that the paperwork was mishandled or an error in the filing of the lien occurred. Sometimes a delay in filing the lien on the vehicle can enable a Chapter 7 bankruptcy Trustee to sell the car.

The bankruptcy Trustee has to pay off the full balance of a publicly noticed lien on a vehicle. In addition, the Debtor has to be paid the full value of any exemption taken on the vehicle equity. In a Chapter 7 case, this has the practical effect of discouraging the bankruptcy Trustee from selling a vehicle where there is a lien plus available exemption(s) that protect most of the value of the car. For example, a $15,000.00 vehicle ( value) with a $10,000 lien ( auto loan that complies with the above requirements for timely filing and recording with the Secretary of State) and a $4,000.00 vehicle exemption would leave $1,000.00 in unprotected equity in the vehicle if the Debtor files Ch 7. The bankruptcy Trustee has to weigh the risk of paying to tow the vehicle, advancing the auctioneer fees, insurance costs and other costs of sale, and having to pay the lienholder AND the Debtor the available exemption out of the sale proceeds. With a small amount of unprotected equity in the vehicle, it would be unwise for the Trustee to sell the vehicle. So long as the debtor remains current with the loan payments the debtor would be able to keep this vehicle in a Ch 7 bankruptcy case.

If the non-protected equity in the vehicle is more than $1,000.00, then you start to get into an area where the debtor may have to offer some money to the bankruptcy trustee to "buy back" the equity from the bankruptcy estate. Remember that the filing of the ch 7 bankruptcy case puts all of the debtor's property into the bankruptcy "estate." There is a sorting out process as the case is administered to see what amount of property, if any, has to be liquidated and paid over to creditors. This is why it is important to consult with an experienced bankruptcy attorney who knows both the legal and local practical realities of handling assets in Chapter 7 bankruptcy cases.

In a Chapter 13 Bankruptcy filing the Debtor retains all of his or her property. There are other issues which could be the subject of a separate blog post.