A question we are often asked is what happens to my car after filing bankruptcy? The answer depends on several questions.
The first question that you will be asked is what is your car worth. To determine this you'll need to have the vehicle appraised. Most trustees will accept an independent value of opinion - that is, the opinion of someone who is qualified to sell cars or value cars, that is not related to you or a friend, that is willing to write out a letter indicating what they believe the fair market value of your car is. Fair market value is the amount that someone (not relatd to you) would pay for your car.
The second question will be "do you have clear title to your car"? Clear title means that there are no liens or other claims to your car. (A "lien" is the technical term for pledging your car as security for a debt.)
What if there is a lien or other claim to my car?
This discussion is easier to understand if we use an example:
"Acme Finance Co. loaned you $5,000 to consolidate your bills and secured their debt by registering a "lien" on your car. Two years later you file bankruptcy. You still owe Acme $3,500, but your car is only worth $1,500".
When you file personal bankruptcy, Acme will be required to prove to your trustee that they have a valid claim and that it ranks in priority to any other claims on your car. If they do, your trustee will "release" the car to Acme. (By "releasing" you car to Acme, the trustee is saying that Acme has a legal right to your car should you fail to make your payments.)
Acme will then request one of the following:
- If your car is worth approximately what you owe Acme then they will probably ask you if you wish to continue making your regular payments;
- If, as in our example, your car is worth less than the amount that you owe Acme you will have to negotiate with Acme to pay them the fair market value of the car; or
- Acme has the right to seize and sell your car.
What if I owe more than the fair market value?
In most cases the lender will not "make a deal" with you. If you owe $3,500 on the car and the car is only worth $1,500, most lenders will still require you to continue paying the balance of the $3,500 loan in full in order to keep your car. You can attempt to settle with them for less, but in most cases they will want either the full amount owing, or the car.
If you have a significant shortfall on your car, it may be prudent to simply surrender the car to the lender when you go bankrupt so that you are not over-paying for the vehicle.
Your trustee can provide you with more information on how to deal with secured car loans in a bankruptcy.
What happens to the rest of the debt?
If you do surrender the car to the secured lender, any resulting shortfall is included in your bankruptcy.
If you're still unclear about what happens to your car after filing bankruptcy in case when its value is less than the amount that you owe the creditor whom holds the lien on it, contact a bankruptcy trustee for a more detailed explanation.
What if the fair market value of my car is more than what I owe?
In the rare cases where your car has a fair market value that is higher than the debt that you owe, your trustee will not release the item to the secured creditor. Instead, your trustee will determine the "net worth" of the item (the fair market value less the amount of debt owed). You will be required either to pay the trustee that amount (as well as continuing to pay the secured creditor what they are owed) or the trustee will seize and sell the item. Most trustees will negotiate payment terms that allow you to pay the net worth of an item over the course of your bankruptcy.
What happens if there are no liens or other claims to my car?
If you have "clear title" to your car and you file bankruptcy, then you will be required to pay the trustee the fair market value of your car, or surrender the car. The only exception is if the car is worth less than $6,600 (updated for 2015 exemption limits) and it has no liens, the car is exempt and will not be seized by the trustee. If you are unable or unwilling to pay for the car then the trustee is required by law to seize and sell your car on behalf of your creditors. Again, most trustees will negotiate payment terms that will allow you to pay for the car over the term of your bankruptcy.
In Ontario a bankrupt is permitted to keep one motor vehicle worth up to $6,600. If your car has no liens and is worth more than $6,600, you may keep the car by paying the trustee, for the benefit of your creditors, the difference. Thus if your car is worth $7,600 with no liens, you can keep the car by paying $1,000 to your trustee (who then puts the money in your estate for distribution to your creditors).