Bankruptcy and Taxi Medallions

After years of steady growth, the value of taxi medallions in Greater Boston has begun to decline rapidly. Much of this is due to competition from ride share companies, such as Uber and Lyft. Many independent medallion owners funded their purchase with loans secured by mortgages on medallions. Many medallion owners are now finding that they can’t earn enough to cover these mortgage payments. To make matters worse, the medallions are now often worth less than half the amount owed on the mortgages.

What is happening today with taxi medallions is very similar to what happened in the real estate market at the end of the 2000s. People invested heavily in real estate by taking out large mortgages, expecting to generate enough rental income to make those mortgage payments, while benefiting from continued increases in property values. Unfortunately for many of these investors, the rental incomes were insufficient to cover their mortgage payments, and when the bubble burst, in some regions, the value of these properties dropped to a fraction of the mortgaged amounts. Many of these property owners were able to save their properties by turning to Chapter 11 of the Bankruptcy Code and restructuring their debts. This same strategy is beginning to be employed by medallion owners who want to keep their medallion and continue to operate, but who can’t afford their current loan payments.

So how does this work? Chapter 11 of the Bankruptcy Code allows a debtor (individual or corporate) to reduce a secured debt, such as a mortgage, on any property that is not their primary residence to a balance to equal the value of the collateral. As people do not reside in taxi medallions, they fit squarely into the class of collateral that can benefit from a “cram down” of its associated loan balance. As an example, one might own a medallion with a $400,000 mortgage and $5,000 monthly payment, but that medallion may now only be worth $200,000. In such a case, Chapter 11 would allow the owner to reduce the mortgage on the taxi medallion to $200,000, and also restructure the monthly payments to a lower payment. This can often make a money-losing taxi business profitable again.

Many savvy real estate investors took advantage of Chapter 11 when the real estate market crashed, allowing them to save their investments and build equity in their properties as the market recovered. This same concept can apply to taxi medallion owners. For many of these owners, they will have to work longer and harder just to keep up, or risk losing their medallion to foreclosure. We predict that many more medallion owners will take advantage of Chapter 11 as a way to retain their medallion and operate profitably. We have expertise in this area and can help. Feel free to call us at 617-338-9400 for a free consultation.

Chapter 11 Bankruptcy May Be the Best Way to Handle Employment Tax Debts

As most small business owners know, there are various business taxes a company is required to collect, account for, and pay over to the taxing authorities. In Massachusetts, businesses are required to withhold income for both state and federal income taxes for employees, pay additional employment taxes, and unemployment insurance to the state and federal governments. Many companies hire payroll service companies to process these withholdings and payments and file the required returns with the state and federal governments. Other businesses handle these matters “in-house” taking the time to calculate the amounts due, file quarterly and annual returns and pay the amounts due to the Internal Revenue Service (“IRS”) and Massachusetts Department of Revenue (“MDOR”). Unfortunately, despite their best intentions, some businesses neglect to file returns or pay employment taxes and are shocked to learn that, after penalties and interest, tax liabilities have ballooned into the hundreds of thousands, or even millions, of dollars. In situations like this, filing for protection under Chapter 11 of the Bankruptcy Code is often the best way to proceed.

The Snowballing of an Employment Tax Debt

An example of what we have seen on many occasions: Mr. Taxpayer owns a small heating and air conditioning repair company which he operates as a limited liability company called Hot & Cold, LLC. Hot & Cold has 6 full-time employees, each paid at hourly rates. Ever conscious of his overhead expenses, Mr. Taxpayer decides that he will handle the payroll himself. All goes well at first until business begins to slow during the holiday season. Then two of the company’s service trucks suddenly need costly repairs. Strapped for cash, Mr. Taxpayer uses the money for payroll taxes to cover repair costs. Not wanting to alert the IRS to his missed payment, he decides to also skip the filing of his 940 and 941 returns, assuring himself he will get caught up once business picks up in the spring. Unfortunately, business continues to be slow and Mr. Taxpayer continues to make up the difference by not paying the employment taxes throughout the year.

The following fall, business has finally begun to pick up again and Hot & Cold is preparing to file its missing 940 and 941 returns and start getting caught up on the arrears. This is when the problems really begin. After filing the outstanding 940 and 941 returns with the IRS and quarterly payroll reports with MDOR and Massachusetts Department of Unemployment Assistance (“MDUA”), Mr. Taxpayer determines that Hot & Cold owes $120,000 in total, which he intends to begin paying immediately, starting with the IRS. Shortly afterwards, Mr. Taxpayer begins receiving notices of assessment, informing him that penalties and interest have been assessed against Hot & Cold for both failing to pay the taxes and failing to file the returns on time. IRS, MDOR and MDUA have assessed penalties totaling more than $25,000 and interest of more than $5,000. On top of that, each agency is demanding payment in full within thirty days.

Mr. Taxpayer first contacts the IRS to explain his situation and ask if he can pay it over time. The IRS agent hesitantly agrees to let him pay the debts over time, but he has to pay it in full within 12 months, including the penalties and interest. On top of that, the agent adds, the penalties and interest will continue to accrue while he is making payments. His efforts to work with the MDOR and MDUA yield similar results. After factoring in penalties and interest that have accrued and will continue to accrue, Mr. Taxpayer calculates that the initial $120,000 in employment taxes will cost him more than $160,000, assuming he can pay it all within one year. Although Hot & Cold is doing well, it is not doing well enough to pay an additional $160,000 over the next year. Mr. Taxpayer is able to make some, but not all of the payments to the IRS, MDOR and MDUA. After missing three installment payments to the MDOR, he received a Notice of Intent to Levy: if he doesn’t pay in full within 30 days, they will seize Hot & Cold’s bank accounts to satisfy the debt. Mr. Taxpayer knows that if this happens he will be unable to make rent and payroll or purchase materials. Frustrated, Mr. Taxpayer considers simply closing the business and starting something new. “If only they would work with me a little” he thinks. Although he continues to operate the business a few months more, the MDOR ultimately levies the business account, seizing the $8,000 he had set aside for rent and payroll that week. With nothing to pay his employees or landlord, Mr. Taxpayer closes Hot & Cold, with substantial liabilities to the IRS, MDOR and MDUA still outstanding.

Mr. Taxpayer and Hot & Cold faced a situation that is surprisingly common among small businesses in Massachusetts and around the country. A relatively small and temporary problem snowballs until it becomes seemingly insurmountable. Different taxing authorities want their debts paid immediately and have little concern for a company’s other expenses or obligations. Often they are willing to effectively shut down a company in order to be first in line to seize property. Even where they do allow a payment agreement, the terms are often too onerous for a small business to comply with while keeping up with other expenses. Situations like these are what the U.S. Bankruptcy Code is partly designed for. Chapter 11 can often be the most effective ways to deal with debts to multiple taxing authorities.

Why File Bankruptcy to Pay Employment Tax Debts?

  • The Bankruptcy Code provides powerful protections against collection activities from creditors, including the IRS and MDOR. Once a business has filed bankruptcy, a provision called the “automatic stay” requires that all collection activity, including levies on bank accounts and seizure of property, cease immediately.
  • Once in Chapter 11, small businesses are allowed up to 300 days to propose a plan of reorganization to deal with their debts, including payment of employment taxes. This allows companies an opportunity to assess their situation, make any necessary changes to the business and operate for a time with out the stress and distraction of dealing with demands and threats from taxing authorities.
  • The Bankruptcy Code allows businesses up to five years to pay most types of tax debts. The taxing authorities have no right to demand that the debt be paid in less than five years, although in some cases they will agree to a payment plan that is longer than five years.
  • Penalties cease to accrue once a bankruptcy case is filed. In the example of Mr. Taxpayer, the late payment penalties continued to accrue on the debt until it was paid, even after he set up the payment plan and filed the returns. In bankruptcy, penalties (but not interest) stop accruing once a case has been filed.
  • Bankruptcy can sometimes be used to avoid tax liens that have been filed prior to bankruptcy. Under the Bankruptcy Code, a debt secured by a lien is considered “secured” only to the extent that there owns valuable property that serves as collateral. So if a company has assets worth only $10,000, but tax liens of $50,000, bankruptcy can reduce the tax lien to only $10,000. Once the $10,000 is paid, the lien is discharged.
  • Bankruptcy can also help to avoid payment of penalties that arose before filing. In order to be approved, a bankruptcy plan must propose to pay virtually all outstanding tax debts within five years. However, penalties are not considered tax debts for purposes of this requirement and often companies can emerge from bankruptcy with a plan that requires only a small percentage of penalties to be paid.
  • Bankruptcy can be used to deal with all of a company’s debts in one forum. Very often when a company enters bankruptcy to deal with tax problems it has many other liabilities as well. These can include bank loans, business credit cards, wages, mortgages, trade debts or outstanding rent. In many cases, the cost of dealing with tax problems before filing bankruptcy causes a business to fall behind on other debts. Bankruptcy allows a business to address all of its debts at once, free from threat of lawsuits, eviction or repossession.

Personal Liability for Business Employment Debts

In the example above, before ultimately being forced to close down Hot & Cold, Mr. Taxpayer considered just giving up and walking away. Mr. Taxpayer would have been surprised to learn later that he is now personally liable for the payment of the so-called “trust fund” portion of the tax debts. The “trust fund” portion of the taxes is the part that was withheld from an employees paycheck and was supposed to be turned over to the IRS or MDOR. Trust fund taxes are different from other business debts in that the designated “responsible party” of the business will be held personally liable for these debts. This is different than withn most other business debts in which the business entity (LLC or corporation) is liable for its own debts and the individual owners are protected. This is major factor for many business owners considering how to handle employment tax liability. While walking away from a struggling business and starting a new endeavor may sound to some like a good option, the threat of personal liability for trust-fund taxes, which cannot be discharged in personal bankruptcy, is a strong motivator for filing a business reorganization under Chapter 11 of the Bankruptcy Code.

Why Call Us About Your Business Debt Problems?

Our bankruptcy attorneys are highly experienced in helping small businesses reorganize under Chapter 11 of the Bankruptcy Code. We understand the complexities of dealing with taxes in bankruptcy and can help guide your business through the process and achieve a successful reorganization. We’ve successfully represented small businesses in many industries including construction, auto sales, government contracting, retail, hospitality, manufacturing and health care. If your business is struggling with debts from employment taxes and associated penalties and interest, call us at 617-338-9400 for a free consultation to determine if reorganizing under Chapter 11 is your best option.

Bankruptcy and Sales Tax Problems

A sales tax debt is a tough debt to have. Because of penalties and personal liability, bankruptcy may sometimes be the only way to manage a tough sales tax problem.

What is the sales tax and who is required to pay it?

The Massachusetts sales tax is 6.25% of the sales price or rental charge of tangible personal property sold or rented inside the commonwealth. The sales tax is required to be charged by all “sales tax vendors” to the purchaser at the time of sale. Sales tax vendors are any person or business that sells, rents or leases tangible personal property that is subject to the Massachusetts sales tax. Certain products are exempt from the sales tax, including food (but not meals in restaurants), clothing, newspapers, magazines, event tickets and sales of utilities and heating fuel to residential customers. You can get more details about sales tax in MA here.

All Massachusetts sales tax vendors are required to collect from their customers the sales tax on the actual retail price (not including sales or discounts) at the time of sale of all property subject to the tax. Vendors must separately itemize the tax in any invoices, receipts, bills or contracts.

Vendors must pay the Massachusetts sales tax when they file their sales tax returns with the Department of Revenue. Most businesses are required to file electronically using the Department of Revenue’s online system, Webfile for Business. The required frequency of filing depends on how much sales tax an individual or business collects in a given period. For businesses collecting less than $100 in sales tax in a given year, the sales tax return need only be filed once a year. For businesses collecting between $101 and $1,200 in a year, the sales tax return must be filed quarterly. For businesses collecting more than $1,201 a year, the sales tax return is due monthly. All returns must be filed within 20 days of the end of the reporting period.

Are there penalties for failing to pay sales tax or file returns?

Yes, the penalty for failing to pay sales tax is one percent of the amount due for each month (or any portion of a month) that the tax remains unpaid, up to 25% of the total amount due. There is also a penalty for failing to file a required a sales tax return on time. Like the penalty for failure to pay, the penalty for failure to file is equal to one percent of the tax owed (whether paid or not) for the filing period for each month (or any portion of a month) that the return is not filed, up to 25% of the tax reported for that period. In addition to the penalties, interest is charged on any amounts due at a rate equal to the federal short term rate (which can change quarterly) plus four percentage points. Once it has assessed an unpaid sales tax liability, the Department of Revenue has the power to issue bank levies, place liens on property, or even seize business assets to get what it can.

My business is organized as a limited liability company, corporation or partnership, can I be held personally liable for the business’ sales tax liabilities?

Yes, Massachusetts law imposes personal liability on the individual responsible for the collection of sales tax on behalf of a business. This “responsible party” is generally an officer, manager or director of the business. Personal liability can be assessed against an individual regardless of whether the sales tax was actually collected from the customer at the time of sale and regardless of whether the responsible party was personal aware of the failure to collect or pay the tax. Once a personal liability against a responsible party has been assessed, the Department of Revenue can enforce it against that individual’s personal property, even if the business ceases operations. Responsible party liability can be enforced for up to 10 years after the date of the assessment of the liability.

How can the bankruptcy system help deal with sales tax related debts?

The Bankruptcy Code is a federal law which, under the United States Constitution, supersedes all conflicting state laws, including those regarding the enforcement and collection of sales taxes. While the Bankruptcy Code does not allow a business to discharge its sales tax liabilities completely, it provides important protections from enforcement actions, including restrictions on the imposition of liens and allows for reasonable payment plans of sales tax liabilities.

In many cases, bankruptcy can discharge penalties that have accrued prior to a bankruptcy filing and will stop future penalties from accruing during and after the bankruptcy process. Even if the Department of Revenue has already placed a lien on property, once in Bankruptcy, that lien can be reduced to an amount equal to the value of the business’ assets, rather than the amount of tax, penalties and interest owed. Addressing sales tax liabilities in bankruptcy proceedings is very complex and requires careful analysis of each individual case.

Our firm is highly experienced in helping individuals and businesses deal with sales tax debts through the bankruptcy process. If you or your business owes Massachusetts sales taxes, feel free to contact our office at 617-338-9400 for a free consultation with one of our attorneys.

Bankruptcy and Home Contractor Disputes

It is quite common for home improvement contractors to seek the protections offered by the Bankruptcy Code when facing a dispute arising out of a home improvement contract.  There are several reasons contractors may want to consider taking advantage of Bankruptcy prior to, during, or after litigation of a home improvement contract dispute.

Bankruptcy Offers the Protection of the Automatic Stay

When you file for bankruptcy protection, the “automatic stay” immediately stops all actions by creditors to collect, enforce or even establish their claims.  Civil law suits are immediately stopped, as are any processes to attach or levy money or property that might be used to satisfy a later judgment.  In many home improvement contract disputes, a homeowner will seek an order attaching real estate, bank accounts or equipment to ensure that those assets will later be available to seize if the homeowner prevails.  For a contractor, the attachment of a business bank account can have a crippling effect on the operation of the business.  Once under the protection of the Bankruptcy Code, homeowners and other creditors are prohibited from attaching any property, allowing the contractor to continue to operate its business freely while defending the claims made against them in bankruptcy court.

Liabilities can be paid through a Court Supervised Reorganization Plan.

When you file a bankruptcy petition under Chapter 13 (individual, sole proprietors) or Chapter 11 (corporations, LLCs), you propose a plan of reorganization that establishes a plan to repay some or all of the debts.  In most cases, the plan will propose a fixed monthly payment that will last three to five years.  The amount of this monthly payment is based on the contractor’s ability to pay, not the amount owed.  The Bankruptcy Code takes into consideration the gross income and expenses of business, and the reasonable living expenses of the business owner.  In many cases, the contractor will pay only a percentage of the total debt that is owed.  This can be a great benefit.

On the other hand, outside of bankruptcy, if an contractor is found liable to a home owner following a lawsuit or arbitration, he can be required to pay the claim in full, immediately.  Under Massachusetts law, a judgment can be enforced by attaching and seizing assets including real estate, equipment, bank accounts and other property.  This can have a devastating impact on an contractor’s business and personal life.  Moreover, an unsatisfied judgment will accrue interest at a rate of 12% each year, so the judgment will grow and grow at an above-market interest rate until it is paid in full. In a bankruptcy plan, a homeowner’s judgment against a contractor will not typically accrue interest once the bankruptcy case has been filed.  Invoking the protections of Bankruptcy shifts control over when and how much a contractor must pay, while allowing the contractor to continue operating their business without losing property.

Litigation Costs Can Be Shifted to Creditors.

This is huge factor that is not commonly understood. In Bankruptcy Court, there is what is known as an adversary proceeding, which functions much like a civil lawsuit in state or federal court.  In home improvement contract disputes, adversary proceedings are frequently used to determine liability under a home improvement contract or, if liability has already been determined in a prior proceeding, to determine whether the claims are excluded from discharge under one of the enumerated exceptions in the Bankruptcy Code.  The costs of litigation in an adversary proceeding are generally born by the bankruptcy estate and are paid through the pot of money that the contractor pays through his or her bankruptcy plan.  Because costs of administration, such as attorneys fees, are given a higher priority than claims of creditors, money that would otherwise be paid to creditors is directed to the payment of attorney’s fees, without increasing the total overall cost of the payment plan.  This is unlike the general process of litigation in which each party pays its own costs.  This can make bankruptcy a far less expensive option than litigation in state court or arbitration. In bankruptcy, unlike outside of bankruptcy, a contractor can often get a defense attorney without a large upfront retainer.

Claims Arising From Home Improvement Contract Disputes are Generally Dischargeable in Bankruptcy Proceedings

With certain exceptions, most types of debt can be discharged in bankruptcy.  Among the exceptions to discharge are debts for money, property or services to the extent they were obtained by false pretenses, false representations or actual fraud, embezzlement or larceny, or for the intentional injury of another person or their property.  In home improvement contract disputes, the homeowner and the contractor often tell two very stories.  The home owner, whether justifiable or not, will often claim that the contractor intentionally injured or defrauded them in order to have their claim excluded from the bankruptcy discharge.  In order to exclude their claim, the homeowner must prove by a preponderance of evidence that their claim falls into one of the exceptions to a general discharge.  The Bankruptcy Court construes exceptions to discharge narrowly in favor of debtors in order to further the Bankruptcy Code’s goals of giving debtors a fresh start.  Unlike in typical litigation context, in bankruptcy proceedings, the homeowner must not only prove that the contractor breached the home improvement contract, but also that contractor acted dishonestly or with the intent to cause harm.  This is a much higher standard than homeowners must meet in state court or arbitration, and it can be very difficult for a homeowner to meet this burden.   In these cases, unless there is clear evidence of fraudulent conduct or intentional harm, the contractor has a distinct advantage in having its case heard in Bankruptcy Court.

Contact Us for Free Consultation

We understand how the Bankruptcy Code can protect contractor against claims from homeowners.  We are highly experienced in defending objections to discharge of claims arising under the Massachusetts Home Improvement Contractors Regulations and can help you determine whether filing for protection under the Bankruptcy Code is the right way to protect your business and property at any stage of a home improvement contract dispute.  Whether you have just received a demand letter from a homeowner or are in any stage of the litigation process, you can contact our office any time to discuss your case with one of our experienced attorneys.

Bankruptcy or Debt Consolidation?

You may have seen or heard commercials on the TV or radio touting debt consolidation through one of many for profit companies as a desirable alternative to filing for bankruptcy.  However, what these companies will not tell you, is that there are many advantages to filing bankruptcy compared to using a debt consolidation company that you should be aware of before making a decision:

The Automatic Stay

When you file a bankruptcy case, you are immediately protected from your creditors by what is known as the “automatic stay.”  The automatic stay prohibits your creditors from calling or writing you to demand payment and immediately stops any lawsuits, wages garnishments, or levies on bank accounts or other assets.   Debt collectors know this, and they abide by it.  Debt consolidation companies will offer you no such protection.  While they maybe working to settle your debts for less than you owe, your creditors are free to commence law suits against you, or take any other legal action to enforce their claim, including garnishing wages and levying bank accounts.

Pay Less With Bankruptcy

There are two types of bankruptcy available to consumers; Chapter 7 and Chapter 13.  Chapter 7, or “straight bankruptcy” eliminates most types of debt, including credit cards, medical, bills, pay day loans, and even some taxes, with no payment plan.  Chapter 7 is available to lower income individuals, or individuals with high secured debt payments.   In some cases, usually where an individual’s income disqualifies them from Chapter 7, Chapter 13 is another option where you propose a payment plan to creditors.  This payment plan is based on what you can reasonably afford to pay each month and lasts between 36 and 60 months.   In many Chapter 13 cases, the required payment can total 10% or less of the amount owed, with the difference being discharged at the end of the payment plan term.  Creditors are bound by the plan and generally cannot object simply because they want a bigger payment.

Debt consolidation companies have little bargaining power in dealing with creditors.  If you owe the money, they have the right to all of it, and generally don’t care who else you owe or how much other creditors are demanding of you.  As such, they are unlikely to agree to as little as 10% of the amount owed. Often, debt consolidation companies are unable to get reductions of more than of 30-50% of the balance owed.

Bankruptcy Discharge Has No Income Tax Effect

Under the Internal Revenue Code, and most state revenue codes, the forgiveness or cancellation of a debt is counted, and taxed, as regular income. This means that if a debt consolidation company is able to settle your $10,000 debt for $6,000, the creditor will be sending you and the IRS a Form 1099, and you will have to pay income tax on the $4,000 that was forgiven.  Many people are not even aware of this when they settle their debts and are quite surprised when they receive the tax bill.   When a debt is discharged in a bankruptcy proceeding, it is never counted as income for tax purposes, providing a truly fresh start.

Stop Interest and Late Fees

When you file a bankruptcy case, the interest and penalties stop accruing on your debt. In a Chapter 13 case, the payment plan is based on what you owed on the day you file. As such, the payments you make in Chapter 13 are actually being applied to what you owe, and not to interest and late fees.

While you are in a debt consolidation plan through a private company, normal interest and penalties continue to add up, increasing your debt. Debt consolidation plans can sometimes last several years before claims are finally settled, meaning potentially thousands of dollars of additional debt. If the debt consolidation plan is unsuccessful (and they often are) you may end up in a worse position than when you started. Also, if the debts are ultimately settled, the additional interest and penalties that are wiped out will be counted as taxable income to you, potentially erasing any benefit of the debt consolidation in the first place.

Have An Attorney By Your Side

It is difficult the underestimate the importance of having an experienced advocate by your side when going through a difficult time in life. Most attorneys who practice bankruptcy law, including those at our firm, specialize in bankruptcy law. They know the ins and outs of the law, the right questions to ask you and the answers to your questions. They will assist you in preparing all of the forms, attend court with you and attorneys are governed by strict ethics rules that require them to be a zealous advocate for you as their client. A bankruptcy attorney’s goal is the same as yours, to get you out of debt in as little time and at as little cost to you as possible.

Employees at debt consolidation companies are not required to have any particular skills, training or expertise and they are sparsely regulated. Many times they will not be able to answer your specific questions or give you any type of legal advice. Their job is simple, sign you up, get you to start paying and keep you paying for as long as possible in order to generate revenue for their company. Usually, debt consolidation companies charge you monthly and they want you to stay in their program as long as possible, meaning they have no motivation to get you out of debt.

If you are feeling overwhelmed by debt, please give our office a call for a free consultation at 617-338-9400.

Can You Keep your Car and File Bankruptcy?

We hear the question all the time: Can I keep my car if I file bankruptcy? There is a fair amount on the web on this topic: It basically comes down to the value of the car, any liens, exemptions, and type of bankruptcy you file.

The Basic Answer

Yes, you can usually keep your car in bankruptcy.  However, I should point out that not everyone wants to keep their car, and you also have the option of surrendering your car in bankruptcy and discharging any balance owed–but this page is more for people wondering if they can keep their car.

The Details

There are two parties that might have a right to your car besides you: the bankruptcy trustee and your car lender. This is an important distinction.  If you have a car loan, you must pay it in order to keep your car, even in bankruptcy, except in some limited circumstances (see below for those).  However, when people ask whether they will lose their car in bankruptcy, they usually plan to pay their car loan, but they want to know if the bankruptcy trustee will take their car despite that.  In other words, they want to know if filing bankruptcy itself will result in the loss of their car, even if they plan on keeping their car loan up-to-date.

In Chapter 13, the answer is simple:  The bankruptcy trustee never takes a car.  That is because Chapter 13 is not a liquidation chapter of bankruptcy in which things are taken. However, in Chapter 7, which is the liquidation chapter of bankruptcy, you must use “exemptions” to protect property you want to keep.  You will not lose a car if you want to keep it, pay any associated car loan, keep it insured, unless you are over the exemption limits.

So, what about exemptions?  In Massachusetts, unlike some other states, one can choose between the state and federal bankruptcy exemptions. Under the Massachusetts exemptions, which can viewed in full here, the car exemption is $7,500.  For a “handicapped person or a person 60 years of age” the exemption doubles to $15,000.  The exemption amount protects “equity.”  To determine equity, you must subtract any car loan balance from the value of the wholesale resale value of the car.

Under the federal exemptions, the car exemption is $3,450 plus an unused “wildcard” exemption–up to $11,975 (a total of $15,425).  How much “wildcard” you’ll use before you get to exempting a car depends on your other property, but people with normal household goods and, say, a 401(k) and no real
estate equity will not use much if any. The bottom line is that under either exemption
schedule, you can exempt quite a bit of car value.

What if you are above the exemption limits and still want to keep your car?

In this scenario, you must either file Chapter 13 or you must bargain with a Chapter 7 trustee to buy back your non-exempt car equity.  Of course, we have experience with all of these circumstances, but this is pretty unusual–most people are under the exemption limits and won’t lose their car, even in Chapter 7.

What were those “limited circumstances” you mentioned above about not paying a car loan and keeping a car?

If you are underwater on your car loan and file a Chapter 13 case, you can cramdown the car loan and pay it in your plan.  What this means is that you would make a payment for the car directly to the Chapter 13 trustee and the creditor’s claim would be bifurcated into secured and unsecured portions, with the secured portion being the value of the car and the overage being deemed unsecured.  This can be very useful to free up money that otherwise needs to be paid to mortgage, tax, or even general unsecured creditors (due to the means test) to accomplish your goals.

There is an important exception to this, however.  If you bought and financed the car within 910 days of the bankruptcy, you cannot cram it down. Under those circumstances, in order to keep the car, you must make your regular car loan payment to your car lender if you want to keep the car.