What happens to my car if I file bankruptcy?
Very few people who declare bankruptcy in Canada lose their vehicle. You need your car to get to work, so losing your vehicle is not an option. All provinces have laws that exempt one car or truck worth up to a certain dollar limit from seizure by the trustee. To find what happens to your car after you file bankruptcy, we look at two key 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 “is your car financed or 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. In other words, is your car financed, leased or has another creditor placed a secured charged against your vehicle.
If you file bankruptcy, there are options that can allow you to keep your vehicle no matter its value. You can also choose to keep, or hand back, a leased or financed vehicle depending on what makes the most sense for you financially.
Keeping a vehicle that you own outright when you file bankruptcy
In Ontario, you can keep any motor vehicle worth up to $6,600 when you declare bankruptcy. You can research other provincial exemption amounts across Canada here.
Most older vehicles qualify for this exemption. Your trustee will look up what is known as the black book value of your car or truck to determine whether your vehicle will be considered property in your bankruptcy or will fall under the provincial exemption limit.
If you own a car outright and the fair market value is more than the exemption limit, you can propose to ‘buy out’ the realizable portion from your trustee over the period of your bankruptcy.
If for example, you have a car worth $8,000, you would have to pay your trustee $1,400. You could do this by making additional payments of $156 during a typical 9-month bankruptcy. If that monthly payment is too much, talk to our trustees about a consumer proposal.
You can keep one motor vehicle under these exemption rules. If you own more than one vehicle and would like to keep both, a consumer proposal may be a better option.
What happens to a leased or financed car in bankruptcy?
Bankruptcy in Canada deals with unsecured debts. If your car is financed, through a lease or car loan, then that debt is considered a secured debt.
If you lease or finance a vehicle and file for bankruptcy, you can keep your vehicle as long as you are, and remain, current on your car loan or lease payments.
Your car lender can, however, repossess your vehicle if you fall behind on your payments, and bankruptcy won’t stop that.
What if you owe more than fair market value or you can’t afford the payments?
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 overpaying for the vehicle. If you think your car loan or lease is too expensive, and you can’t afford to keep up with your payments, you have the option of handing back the vehicle to the lender.
In either case, you must return the vehicle to lender before you file. If you do surrender the car to the secured lender, any resulting shortfall after they sell the vehicle is eliminated as part of your bankruptcy.
In rare circumstances, people sometimes offer their vehicle as collateral for a larger consolidation loan. This is slightly more complicated however a trustee can walk you through options that can help you keep the vehicle if that makes sense.
File a consumer proposal to keep your car and other assets
A consumer proposal is not a bankruptcy. In a proposal you make a settlement offer to repay a portion of your debts. Any offer you make is affected by assets you own that are not exempt in a bankruptcy. However, in a consumer proposal, you keep all your assets, including your car and your home.
A proposal may make more sense if you:
- Own multiple vehicles
- Own a car or truck worth more than the allowable limit
- Can afford to make a settlement offer to your creditors.
If you are struggling with debt, know that you don’t lose everything when you claim bankruptcy. Book a free, no-obligation consultation with one of our Ontario Licensed Insolvency Trustees to explore your options.