Many people worry about losing all of their belongings, especially their car, when they file for Chapter 7 bankruptcy. Fortunately, there is a way to keep it.

When you file for bankruptcy, you can protect property that you'll need to work and live by “exempting” it from your bankruptcy case. So if you own your vehicle outright or you're currently on your vehicle payments, exempting your vehicle from your case is possible.

In order to see if you're eligible to have your vehicle exempt, you must first determine your vehicle's value. In your bankruptcy paperwork, you will be required to report the current market value of your vehicle, which is the amount you can sell it for based on its current condition and age.

Once you figure out the value of your vehicle, then you must determine how much equity is in it. If you own your car outright, the equity in your vehicle is the same as the car's value. For example, if the vehicle is worth $3,500, your equity is also $3,500

If you have a car loan, the equity is the amount you would have left over if you sold the car and paid off the loan. For example, if you sold your car for $9,000 and paid off the $4,000 loan balance, you would still have $5,000 left to put in your pocket. The amount you are able to keep is considered your equity.

By contrast, if you owe as much as the car is worth, then your equity is zero. If the car is worth less than you owe, then you will have negative equity.

So in order to keep your vehicle, you must be able to protect the equity with a bankruptcy exemption. Virginia law allows up to $6,000 in motor vehicle equity. So if the $6,000 exemption covers all of your equity, the trustee—the person responsible for managing your case—cannot sell your vehicle. But if you have unprotected equity, the trustee can sell your car, give you your exemption amount, and distribute the remaining amount among your creditors.

If you are behind in your car payments, you will lose your vehicle in Chapter 7 bankruptcy, despite having your equity exempt. However, you can still keep it if you take care of the arrearage or agree to some type of payment plan.

For more information, contact our Richmond bankruptcy attorney at Bruce W. White, P.C. today.