Filing a Chapter 7 bankruptcy doesn’t necessarily mean you will lose your home or your car. Bankruptcy laws allow filers to take exemptions that help them protect their property. However, the amount of equity you have in your home or car affects whether you can keep it. Your equity must be less than the exemptions for which you are eligible if you want to keep your house and car. Additionally, you can reaffirm or redeem some debts to protect your property.
What Is Equity?
Equity is the ownership you have in your property. For example, if your home is worth $150,000 and you still owe $120,000 to a mortgage company, your equity is $30,000. The same basic formula can be applied to your car. If you own it outright, you have 100-percent equity in your car. If, on the other hand, you owe $2,000 on a car that is worth $6,000, you have $4,000 equity in your car.
What Are Exemptions?
When you file for Chapter 7 bankruptcy, the trustee on your case will consider your assets. If you have property of value, the trustee may decide to sell it and use the funds to pay your creditors. Fortunately, exemption laws allow you to protect a certain amount of your property from your creditors during a bankruptcy proceeding. The amount of property you can exempt, however, depends on the federal and state exemptions for which you are eligible.
Many states have a homestead exemption that allows you to protect some or all of the equity you have in your primary residence. The laws that govern homestead exemptions depend on your state, so you will have to check state laws to learn how much you can shield. If all of the equity in your property is exempt under a homestead exemption, you can protect your home when you file Chapter 7. Additionally, you might be eligible for a federal homestead exemption if you can’t take advantage of a state exemption.
Wild Card Exemption
Depending on your state, you may also apply a wild card exemption to protect your home. A wild card exemption is an amount you can apply to any of your property. Some states allow you to apply this to your home while others do not. These exemptions are often small, however, and may not amount to enough to cover all of your equity. If your state allows you to use them in conjunction with the homestead exemption, they can help move you towards keeping your home.
Keeping Your Car
You can also use exemptions to protect the equity you have in your car. For example, you might decide to apply an automobile or wild card exemption to cover ownership you have in your vehicle. Using an exemption to cover equity is not your only choice, however. Depending on the portion of the non-exempt equity in your vehicle or house, your bankruptcy attorney could make an offer to the chapter 7 trustee to “purchase” the bankruptcy estate’s interest in your home or car. That sentence seems to be difficult to understand. Why should I purchase part of a home or car that already is mine? When you file for bankruptcy, everything you owe and own becomes part of a so called “bankruptcy estate”. The chapter 7 trustee administers the bankruptcy estate. He will do this by looking at your bankruptcy petition, tax returns, pay stubs, and conducting the trustee’s meeting with you in which he will ask you if everything on the petition is correct and to clarify any questions the trustee might have. In most cases, the bankruptcy estate (your real and personal property) does not have any un-exempt value the trustee could take. In these cases he will file a report to abandon all assets. If however, the trustee finds un-exempt equity in your property, he does not really want to sell your car or house. The debtor could either pay the un-exempt portion to the trustee or if the debtor does not have the full amount available, the debtor could make the trustee a reasonable offer. Some trustee’s exempt payment plans or wait a few weeks if a debtor will be able to pay. The alternative is to convert the chapter 7 case to a chapter 13 case and pay the un-exempt equity over 3 to 5 years. Dealing with un-exempt property should not come as a surprise. Your bankruptcy attorney will review your assets at the first consultation and when preparing your petition. In the case that exemptions do not cover all equity, your St. Louis Bankruptcy attorney will discuss the best strategy for you.
Another way to protect your property is to reaffirm the debt. This means you sign a new agreement with the lender. In this situation, you keep your car but accept responsibility for continuing your payments. If you fail to do so, you face the possibility of repossession, as the lien your car creditor has on your vehicle survives the bankruptcy. The bankruptcy protection ends 45 days after the trustee’s meeting if a reaffirmation agreement has not been filed for your vehicle. If you are not current with your car loan, the lender might repossess your vehicle after the 45th day. Your bankruptcy attorney will discuss the pros and cons of reaffirming a debt and will explain to you how to fill out the reaffirmation agreement.
If you’d rather not reaffirm your car loan, you might consider redeeming it. This means you purchase the car from the lender and keep the car. When you choose a redemption, you don’t have to pay the total amount of the loan. Instead, you pay the car’s current value. Not all vehicles are eligible to be redeemed. The new lender normally requires that the vehicle is not older than 7 years and does not have more than 100,000 miles.
In some cases, bankruptcy filers keep their cars without reaffirming or redeeming the debt. To keep your car without a redemption or reaffirmation agreement, you would have to continue paying your loan, but you wouldn’t sign a new contract. This works in some situations but can be risky. Depending on state laws and the terms of the loan agreement, the lender may have the right to repossess the car, even you don’t fall behind on your payments. In St. Louis our office has seen creditors making the threat that they will pick up the car if the debtor does not sign the reaffirmation agreement. However, we have not seen a case in which the creditor actually did it. If you want to keep your car, signing the reaffirmation agreement has the advantage that your creditor will report future payments to the credit bureaus. This will increase and re-establish your credit.