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 related 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.)
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:
Using the example set out above, when you filed bankruptcy you owed Acme $3,500 and your car was worth $1,500. Under the terms of your bankruptcy, you are required either to pay Acme $1,500 (the fair market value of your car) or surrender to them your car.
Keep in mind that Acme is within their rights to request the full $1,500 as soon as the trustee releases the car, or they can negotiate payment terms with you - it's up to them and to you to reach an agreement. If you are having difficulty reaching an agreement, your trustee may be able to assist with the negotiations, but in the end, it's up to you and Acme to make a deal.
To continue using our example, after you've "settled" with Acme on the car, they are still owed $2,000. (To "settle" with a creditor means, "to make a deal with".) What happens to the $2,000? Well, it's an unsecured debt and therefore taken care of in your bankruptcy (i.e. you don't repay it).
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.
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.
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 $5,650 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.
Effective December 14, 2005, in Ontario a bankrupt is permitted to keep one motor vehicle worth up to $5,650. (Prior to April 15, 2001, when the law changed the last time, regardless of the value of the car, in bankruptcy a person had to surrender the vehicle, or pay its fair market value to the trustee).
Effective June 22, 2006, if your car has no liens and is worth more than $5,650, you may keep the car by paying the trustee, for the benefit of your creditors, the difference. Thus if your car is worth $6,650 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).
These rules are complicated, so please contact us if you have any further questions, or if you want to set up a no-charge initial consultation.