Do I Lose My Car if I File for Bankruptcy?

No, in most cases. The Bankruptcy Code, which gives honest yet unfortunate debtors a fresh start, recognizes that people need cars to work, go to school, run essential errands, and otherwise live from day to day. Illinois’ bankruptcy exemptions recognize this fact as well. So, in most cases, you don’t lose your car if you file for bankruptcy, because formal and informal exemptions protect motor vehicles. More on that below.

Property exemptions, especially the unwritten and informal property exemptions, are very complex. Therefore, a Chicago bankruptcy lawyer is an important partner in these proceedings. Only a lawyer identifies the best way to protect your precious motor vehicle, which may include little-known loopholes and exclusions. Perhaps more importantly, only a Chicago bankruptcy lawyer advocates for debtors if things go sideways.

Formal Exemptions

State bankruptcy exemptions protect most essential property from creditor seizure. The motor vehicle exemption and wildcard exemption apply to motor vehicles.

735 ILCS 5/12-1001(c) exempts up to $2,400 of equity in any one motor vehicle. At first blush, this exemption seems incredibly small. Many motor vehicles, even used vehicles, are worth ten times as much. Furthermore, unlike other states, Illinois doesn’t allow debtors to spread the exemption among multiple vehicles.

However, as we all know, appearances are often deceiving. The 735 ILCS 5/12-1001(c) exemption is a good example.

There’s a significant difference between value and equity, especially since vehicle loans are amortized and owners pay mostly interest for the first half of the loan. Additionally, most motor vehicles quickly lose most of their value, especially if they’re involved in minor accidents.

So, most people have almost no equity interest in new cars. Although they have substantial equity interests in used cars, these vehicles typically have almost no market value.

Incidentally, the “market value” is not the price at a used car lot. The market value, under the Bankruptcy Code, is an asset’s garage sale value (as-is cash value). Most vehicle investors pay pennies on the dollar for no-inspection, as-is cash vehicle purchases.

Furthermore, the state’s wildcard exemption protects $4,000 of any property, other than real estate, in Illinois. So, if a debtor has more than a $2,400 equity interest in a motor vehicle, the wildcard exemption could fill the gap. Alternatively, if the debtor wants to protect another motor vehicle from seizure, part or all of the wildcard could apply.

Informal Exemptions

For purposes of this post, two of the most important informal bankruptcy exemptions are the financial responsibility rule and the power of the reaffirmation agreement.

The trustee (person who manages a bankruptcy for a judge) cannot automatically liquidate nonexempt property. That liquidation must be in the best interests of the creditors.

Assume Megan has a $3,400 equity interest in a vehicle. Her vehicle needs repairs totaling about $1,500. After the trustee pays for the repairs and pays Megan for her $2,400 equity exemption, the creditors would most likely lose money on the sale. That’s especially true since the trustee must also pay to seize, store, advertise, and sell the car.

As a result, the seizure wouldn’t be in the best financial interests of the creditors, and Illinois law prohibits that sale.

Furthermore, bankruptcy legally wipes out all existing security agreements. The reaffirmation agreement, which many lawyers believe is a technicality, is a chance to renegotiate interest rates and other important financial provisions.

A Chicago bankruptcy lawyer usually has a bank over a barrel in these negotiations. The bank wants money. It doesn’t want a used car.

 Work With a Thorough Cook County Lawyer

No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.

Source:

scholarship.law.ufl.edu/flr/vol69/iss1/3/