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.

Stopping Foreclosure with Bankruptcy

If you fall behind on your mortgage payments, and the lender has accelerated the loan and begun foreclosure proceedings, a Chapter 13 bankruptcy is often the only realistic way to save your home from foreclosure.

Unless you can come up with all the unpaid mortgage payments, late fees, legal fees, and other costs right away, your lender will often proceed with foreclosure while offering loan modification options under HAMP and other programs, which may or may not halt the foreclosure. People often rely exclusively on the loan modification programs until it is too late and they are on the eve of a foreclosure sale.

A key point to keep in mind is that until the lender agrees to stop the foreclosure by entering into a loan modification, the law firm handling the foreclosure will be proceeding full speed ahead. This confuses many people. The bottom line is that it is good to know about Chapter 13 bankruptcy, which can be a clear solution for some people, even if you want to give the loan modification a chance.

Chapter 13 bankruptcy is the only way to immediately stop the foreclosure process and force a lender take payments of arrears over time (3-5 years).

Besides saving your home, Chapter 13 often provides the substantial added
benefit of discharging unsecured debt (like credit cards), resolving tax problems, and reducing the amounts owed on debts like car loans.

You can get more detail here: Chapter 13 bankruptcy.

Dyck O’Neal Lawsuits in Massachusetts

Throughout 2014 we have been dealing with a flood of lawsuits from a debt collection firm called Dyck O’Neal. The
lawsuits are mostly from Florida, and they arise out of mortgage foreclosure deficiencies judgments purchased by Dyck O’Neal.

Former homeowners who left homes or second properties in Florida and moved to Massachusetts are now (as of mid 2014) being served here in Massachusetts for lawsuits in Florida.

You have a few options when served with such a lawsuit.

  • Find and pay a lawyer in Florida to fight the judgment in court there;
  • File bankruptcy in Massachusetts if you qualify to discharge the debt. You can contact us for that if you live in Massachusetts.
  • Negotiate with Dyck O’Neal, either yourself or through a Florida or Massachusetts lawyer. You can also contact us to retain us to help with this option.

We are Massachusetts lawyers, not Florida lawyers, but we can help with Massachusetts matters related to Dyck O’Neal.

Chart of Time Between Bankruptcy Cases

If you have filed a bankruptcy in the past and want to file again and get a discharge, what are the waiting periods that apply? This simple chart will tell you based on bankruptcy type.

Chart of Time Between Bankruptcy Cases

Chart of Time Between Bankruptcy Cases

* Time between bankruptcy cases is computed from filing date to filing date.
* These limitations only apply when you’ve received a discharge in the previous case.

Remainder Interest not Eligible for Massachusetts Homestead

Judge Boroff of the Massachusetts Bankruptcy Court has held that an owner of a remainder interest in a home could not claim a homestead exemption. The case is on re Gordon, Case No. 11-44524 (Bankr.D.Mass August 28, 2012).

In Gordon, the debtor held a remainder interest in her home. All first-year law students learn about remainder interests during their first weeks of property class. A remainder interest exists when someone owns a life estate (i.e. owns a property just during their lifetime without the power to sell or devise the entire “fee simple” interest in the property – also called a “life tenant”) and another person is entitled to the property after the death of the life tenant. Thus was the case here. The debtor owned a 1/4 remainder interest in her home. To be entitled to a homestead, as the Court put it: “‘the Debtor (1) must be an “owner'”; and (2) must “‘occupy or intend to occupy the home as [her] principal residence.'” It was undisputed that the debtor occupied the home as her principal residence, but the case turned on whether she was a “owner.” The court said no.

The Massachusetts Homestead Statute defines “owner” as “a natural person who is a sole owner, joint tenant, tenant by the entirety, tenant in common, life estate holder or holder of a beneficial interest in a trust.” Mass. Gen. Laws ch. 188, §1. Because the debtor did not hold one of the enumerated interests in property, the court held that the debtor wasn’t an “owner” and, consequently, could not claim the protection of the homestead exemption.

Massachusetts Bankruptcy Court Rules on Homestead Proceeds Exemption

Judge Hillman of the Massachusetts Bankruptcy Court days ago issued an opinion holding that a debtor could not extend his homestead to the surplus proceeds of a foreclosure sale. The court read the language of the statute quite literally:

If a home that is subject to an estate of homestead is sold, whether voluntarily or involuntarily, taken or damaged by fire or other casualty, then the proceeds received on account of any such sale, taking or damage shall be entitled to the protection of this chapter during the following periods.

MGL c 188, sec. 11

The key was the word “received.” The debtor in this case had his home foreclosed on, and there was a surplus from the sale. He filed bankruptcy to claim a homestead exemption in the proceeds of the foreclosure (in the amount after the mortgage was paid) as against other creditors who would have a right to this money. The court held that because the debtor never “received” the proceeds, so the statute, read literally, prevented a claim of homestead in the proceeds. The court further stated:

If I were to guess, and assuming that the legislature considered the problem at all, I would opine that it was not a literal meaning intended, but rather something like “the proceeds to which the person benefitted by the homestead is entitled on account of such sale”, but I do not think that I have the authority to revise the language to accomplish that end.

If other courts follow this decision, it will create a situation in which debtors with home equity facing foreclosure must make absolutely sure they file bankruptcy before a foreclosure sale so that they can receive and control the proceeds of sale themselves.