One of the biggest fears many people have about filing bankruptcy is whether or not they’ll be able to keep their car.
That’s entirely reasonable. After all, people going through bankruptcy still need to go grocery shopping, take their kids to school, and get to and from work—just like everyone else. While walking, biking, or taking the bus might be an option for some, not everyone can realistically go car free. And if you don’t have access to a vehicle, it can be even harder to get back on your feet.
The good news is that, in many cases, individuals filing for bankruptcy in Michigan can keep their cars. However, it may depend on critical factors such as whether you file Chapter 7 or Chapter 13 bankruptcy, how much equity you have in the vehicle, and more.
In this blog post, we will discuss how to file bankruptcy and keep your car in Michigan, what factors you need to consider, and how a Michigan bankruptcy attorney can help.
Step One: Determine How Much Your Car Is Worth
The following applies to vehicles that you own, including those for which you are still making loan payments. If you’re driving a leased vehicle, the rules are different (although you still may be able to keep it). More on that later in the article.
Regardless of what type of bankruptcy you choose, knowing what your car is worth is an essential first step. In Chapter 7 especially, it may determine whether you’re able to keep your car at all. But it also may help you decide if keeping it is worth it or not.
Typically, the value of your vehicle is based on its fair market value. This is how much you could realistically get if you sold it. Useful resources to determine fair market value include Kelley Blue Book, as well as local car sales websites.
Calculating Your Car’s Equity
Once you know how much your car is worth, you’ll need to figure out how much equity you have. This depends on the ownership status and any loan payments you have left.
- If you own the vehicle outright—no more payments—then the equity is the same as the fair market value.
- If you’re still paying off a loan, you’ll need to subtract the balance of the loan to determine your equity. For example, if the car is worth $15,000, and you have $6,000 left on the car loan, you have $9,000 in equity.
Again, keep in mind that we’re talking about car loans, not leases. If you’re leasing your vehicle and would like to keep it, you can skip ahead a few sections.
Step Two: Apply Federal or Michigan Bankruptcy Exemptions
During bankruptcy proceedings, filers can claim a number of exemptions, up to a certain dollar value, in various categories. These exemptions allow you to either:
- Keep your property (if its value is fully covered by the exemption)
- Take the amount covered by the exemption in cash (if the item is sold)
Exemption categories include retirement accounts, tools of the trade, your home, or your vehicle.
The State of Michigan has one set of exemption guidelines, and there’s a separate set of federal guidelines. Michigan filers can choose one set or the other.
Unfortunately, you can’t pick or choose by category—you’ll have to go all in on one or the other. An experienced bankruptcy attorney can help you figure out which set is best for you overall.
When it comes to protecting a car through bankruptcy, the main exemptions that would apply are the motor vehicle exemption and the wildcard exemption.
- Motor vehicle exemption: The Michigan motor vehicle exemption is set to increase from $3,750 to $4,250 on April 1, 2023. Thresholds are adjusted based on inflation every three years. The federal exemption is currently $4,450, with the next adjustment set to take place in 2025.
- Wildcard exemption: Federal bankruptcy guidelines also offer a “wildcard” exemption that can be used to protect an asset that doesn’t otherwise qualify for a specific exemption or can be “stacked” on top of an existing exemption. The current exemption is $1,475—although this can be increased by up to an additional $13,950 if you do not use all your homestead exemption.
Let’s illustrate this with some simple examples.
If you choose Michigan’s bankruptcy exemptions, you can protect a vehicle with up to $4,250 in equity from being taken in bankruptcy (effective April 1, 2023).
If you choose federal bankruptcy exemptions, you can protect a vehicle with:
- Up to $4,450 in equity if you only use the motor vehicle exemption.
- Up to $5,925 in equity if you choose to apply the wildcard exemption.
- Potentially up to $19,875 in equity if you apply both exemptions plus the maximum unused homestead exemption. This might be available to you if you don’t own a home or don’t want to keep your house.
Clearly, the federal guidelines are more generous as far as vehicle protection is concerned. However, Michigan’s guidelines may be more generous in other areas, particularly if you own a home. Again, it’s best to work with an experienced bankruptcy lawyer to decide your best course of action.
Step Three: Are You Filing Chapter 7 or Chapter 13 Bankruptcy?
If your vehicle equity is fully covered by the exemptions described above, good news—you don’t have to read this section. As long as you’re current on your monthly payments, you can keep your car if you wish to do so.
But what happens if you have too much equity? Will you still be able to keep your car in bankruptcy? That depends on what type of bankruptcy you file, and the choices you make. This post will discuss two of the most common scenarios for individual bankruptcy filers, Chapter 7 and Chapter 13.
Options When Filing Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as a “liquidation” bankruptcy. If you file for Chapter 7, a court-appointed bankruptcy trustee will sell your assets to pay off creditors—potentially including your car.
If you can’t exempt the full value of your car when filing Chapter 7, there’s a good chance the trustee will choose to sell it. Once sold, they give you the exemption amount, and pay unsecured debts with the rest.
Here’s a quick example of how this works. Let’s say you have $10,000 in equity for your vehicle, and you chose the Michigan state exemption of $4,250. In this case, the trustee would probably sell the car, pay you $4,250 for the exemption (which you could use to buy a different car), and use the remaining $5,750 to repay your unsecured creditors.
However, you might still have a few options to keep your car you’re still making loan payments on time, even if you can’t exempt the full equity of the car. They include:
- Reaffirmation agreement. Under this option, you agree to continue making vehicle loan payments despite going through bankruptcy. The agreement must be filed with, and approved by, the bankruptcy court. However, if you later default on the loan, the lender can repossess the vehicle and hold you liable for any difference between the loan balance and whatever they sell the vehicle for. Worse, because you can’t file bankruptcy again for at least eight years, and it stays on your credit report for 10, it makes it more difficult to keep your car or buy a new one if you ultimately lose it.
- Redeeming the car. Under this option, you pay the lender the current fair market value of your car in one lump sum, rather than continue to make monthly payments. However, coming up with that much cash at once while going through bankruptcy isn’t going to be a realistic option for most people.
Options When Filing Chapter 13 Bankruptcy
Chapter 13 is also known as a “reorganization” bankruptcy. In Chapter 13, you enter a repayment plan and pay off your debts over a period of three to five years. This can include, among other things, car equity and car loans—even if you’re currently behind on car payments.
In general, it’s much easier to keep a car through the Chapter 13 process than Chapter 7. That’s because Chapter 13 is specifically designed to help filers keep their property (even non-exempt property) as long as they can afford the repayment plan.
The question, then, is, can you afford the payments?
Here’s a quick example of how this might work. Let’s say you own a vehicle worth $10,250 outright—$6,000 more than the Michigan motor vehicle exemption. Under Chapter 13, you can choose to keep the car. However, because $6,000 of the car’s value is not exempted, you’ll owe an extra $6,000 to your unsecured creditors over the course of your repayment plan.
Additionally, if the value of your car is less than the amount you owe on the loan, you may be able to reduce the amount of the auto loan through a process called “cramdown.” For example, if you owe $14,000 in loan payments, but your car is only worth $9,000, cramdown allows you to reduce the auto loan to $9,000. The difference ($5,000) would be treated as unsecured debt and become part of your repayment plan. Doing this can help reduce your monthly payments overall and make keeping your car more feasible.
What If I’m Leasing My Car?
Unlike a car loan, which is considered a form of secured debt, a lease is a contract. If you’re leasing your car, you don’t actually own it or have any equity—you’re simply renting the vehicle, with the expectation that you’ll return it (or buy it out) at the end of the lease.
Whether you choose Chapter 7 or Chapter 13, you basically have two options when it comes to a leased vehicle. You can either:
- Assume the lease. In other words, nothing changes. You’ll still be responsible for fulfilling the terms of the original lease contract, including monthly payments, and mileage fees.
- Reject the lease. You surrender your vehicle to the lender and stop making payments. If you file Chapter 7, you won’t be responsible for any mileage fees or car damage either—you’ll be completely off the hook. If you file Chapter 13, the lender can file a claim with the bankruptcy court to recover these penalties.
What If My Car Has Already Been Repossessed? Can I Get It Back?
If your car has already been repossessed, but not yet sold, a bankruptcy filing may help you get your vehicle back.
When you file for bankruptcy, the court issues an “automatic stay” that prevents the car from being sold. This buys you time to work out an arrangement to keep your car, either through a reaffirmation agreement or redemption (Chapter 7) or including it in your repayment plan (Chapter 13).
A Bankruptcy Attorney Can Help You Choose the Best Option for Your Circumstances
The bankruptcy process gives filers many potential options to keep a personal vehicle. However, there are pros and cons to each choice. And sometimes, even if you can keep your car, surrendering it (and receiving the exemption limit in cash instead) might be the smarter decision.
Bankruptcy law is extremely complex. And while keeping your car might be one of your biggest concerns, it’s probably not the only one. Your experienced bankruptcy lawyer will help you understand your options, and help you find the best way back to financial stability.
The compassionate bankruptcy lawyers at CBH Attorneys & Counselors have years of experience helping individuals and businesses of all sizes work through their debt problems and come out as strong as possible on the other end. To schedule your consultation with our team in either Grand Rapids of Kalamazoo, fill out our quick contact form today or call us at (616) 608-3061.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.