What Happens to my Car if I File Bankruptcy or a Consumer Proposal?

Posted in Personal Bankruptcy | Consumer Proposals

car and bankruptcy

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).

how to keep car bankruptcy or proposal

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10 thoughts on “What Happens to my Car if I File Bankruptcy or a Consumer Proposal?

  1. Sarah

    My husband and I are thinking of filing for bankruptcy. I have a minivan that is worth $3000. My husband borrows a car from his mother which is in her name. WI’ll anything happen to this borrowed car? We live in the country and both need vehicles to get to work and drive our kids to school or daycare.

    Reply
    1. J. Douglas Hoyes, CA, Trustee

      Hi Sarah. The short answer is “no”, nothing will happen to the car your husband borrows from his mother, because it’s not his car. If you go bankrupt you are required to declare all of your assets, but that car is not one of your assets, because you don’t own it. Your trustee can provide you with further details, but based on what you have said it should not be an issue.

      Reply
  2. john

    Just curious I am going to file bankruptcy. I owe 40,000 on my car and the value of the car is only 20,000. I had to drag over debt from my previous car so I am now over paying. I wanted to get rid of the debt when I file for bankruptcy. will they take my car. and if so will they take it rite away?

    Reply
    1. J. Douglas Hoyes, CA, LIT

      Hi John. Since you have $20,000 of negative equity in your car, it would make sense to surrender your car, either before or at the start of the bankruptcy. You could keep the car, but that would mean you would have to continue making all of the payments, and it doesn’t make sense to pay $40,000 to keep a $20,000 car.

      My standard advice, before filing bankruptcy, would be to explore other options (either an inexpensive used car, or other transportation options), so that you can return the car to the lender before the bankruptcy starts, so that you know for sure the shortfall is included in the bankruptcy. Your licensed insolvency trustee can explain the process and give you advice in more detail before you file.

      Reply
  3. Tania

    Hi There,

    I just filed for a proposal which includes my car and owe 38k on my car but it’s actually valued at about 25k. My questions is, I applied for the loan with my ex however he’s not entering a proposal and I’ve been told that he wold be responsible for the shortfall once I’m done paying off the proposal. Can you please clarify if this is in fact the case and how that would impact him? I really don’t want him to have to pay for anything since it was my responsibility but want to know approximately how much the proposal would cover when it comes to the amount owing on the car.

    Thanks

    Reply
    1. J. Douglas Hoyes, CA, LIT

      Hi Tania. This would be a good question to ask your consumer proposal administrator (your trustee). Without knowing the specific details I can only give you a general answer.

      It appears that you are saying that you surrendered the car. If the lender sells the car for $25,000, and the loan was $38,000, the shortfall would be $13,000. That $13,000 would be a claim in your proposal, and they would get a share of the proceeds of your proposal. For example, if the creditors are receiving 30 cents on the dollar in your proposal, they would get just under $4,000 between now and when the proposal finishes (which can take up to five years).

      Since the lender is not getting all of their money, they will presumably contact your co-signer (your ex) and pursue them for the money as well, until they have collected everything.

      Again, that’s a general answer, so you should consult your proposal administrator for a more specific answer in your situation.

      Reply
  4. ryan

    i just got a car loan amounting 22 th plus 10% interest. whats gonna happen if i file a consumer proposal because CRA is garnishing my wages

    Reply
    1. J. Douglas Hoyes, CA, LIT

      Hi Ryan. You have two choices when you file a consumer proposal: you can keep the car and keep making the loan payments, or you can surrender the car and stop making payments, and any amount remaining on the loan after the car is sold will be included in your consumer proposal. Feel free to contact your nearest Hoyes Michalos office and we can arrange a no charge initial consultation, in person or over the phone, to discuss which option is best for you.

      Reply
  5. gerald g.

    hi.i had bought my son in law a car 2 years ago.the payment where good until 4 month ago.i don.t own the car my name was never on the car. just the loan.what happens to the car now that i have declared bankruptcy.and the loan is now a part of my bankruptcy.

    Reply
    1. J. Douglas Hoyes, CA, LIT

      Hi Gerald. This is a question you should ask your trustee.

      If the loan payments are up to date, and if your son in law confirms with the bank that he will continue to make the payments, it’s probably not an issue. However, there may be other factors, so I suggest you discuss this with your trustee who will have full information about your file.

      Reply

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