If you’re worried about losing your car if you file bankruptcy, you can relax. Most people are able to keep their car, usually for one of two reasons. First, the car is worth less than what they owe on the loan. Second, even if the car is worth more than the loan (if there is a loan), Colorado bankruptcy rules protect most cars.
The Colorado Vehicle Exemption Can Help You Keep Your Car
When you file bankruptcy, there are rules that allow you to protect certain property. Those rules are called exemptions. There are exemptions for all sorts of things, such as clothing, jewelry, even burial plots.
Of course, there is even one to protect your car.
The Colorado vehicle exemption allows you to keep up to $7,500 ($12,500 if you are 60 or older or disabled) in equity in up to two vehicles you own. To be clear, each car isn’t allowed that exemption, you have to spread that exemption over two cars. So, if your car is worth $12,000 and you owe $10,000, you have $2,000 in equity, which will be entirely protected by the Colorado vehicle exemption. If you file a joint petition with your spouse, the exemption amount is doubled.
If you use your vehicle for work (other than just using it to get to and from work), you might be able to apply the Colorado tools of the trade exemption, which allows you to protect up to $30,000 in tools you use to earn a living. You can’t use the tools of the trade exemption just because you use the car to drive to work.
In most cases, you will not lose your car during your bankruptcy case as long as your equity in the vehicle is fully exempt. If you have taken out a loan that has been secured by your car (meaning you promised the lender it could have your car if you failed to pay the loan back), bankruptcy does not make that security interest go away. If you don’t make your payments on that loan, the lender will be able to take and sell the car, before, during, or after the bankruptcy case.
If you are not behind on your loan payments, you should be able to keep your car as long as you are making payments. When you pay off your car, you’ll get the title. You may even be able to negotiate a lower principal amount, based on what your car is actually worth. If you are behind on your loan payments, you may want to file a Chapter 13 bankruptcy petition.
Chapter 13 bankruptcy may allow you to pay what your car is currently worth versus what your loan amount is (this is called a “cram down”. Chapter 13 also allows you to catch up on your back payments and bring the loan current. However, I rarely advise someone to file a Chapter 13 if the only reason to do so is to keep the car. A Chapter 7 is usually a better option.
What If My Car Is Worth More Than The Colorado Vehicle Exemption?
Don’t panic. The bankruptcy trustee doesn’t want your car. The trustee wants the unprotected equity. Let’s say your car is worth $10,000 and you don’t have a loan on it. Remember, the Colorado vehicle exemption only protects $7,500 in equity. So, you have $2,500 in unprotected equity.
Again, the trustee doesn’t want the car, the trustee wants the unprotected equity. In Colorado, the trustee will allow you to set up a payment plan to pay that unprotected equity. He’ll take that money (after he takes a percentage for himself) and distribute it to the people you owe money to. As long as you pay the agreed upon amount, all is good. If you don’t pay that money, he’ll ask the court to sell the car. He’ll have it auctioned off, give you $7,500 and distribute the rest to the people you owe money to.
Talk To A Bankruptcy Lawyer Before You Buy A Car If You Are Thinking of Filing Bankruptcy
Buying a car right before you file bankruptcy is a bad idea. Doing so can put your car at risk if you file a Chapter 7. The bankruptcy trustee can sell your car right out from under you. He doesn’t care if it’s your only source of transportation and you need it to go to work. If you are thinking of filing bankruptcy, it’s probably better to wait until after you file to purchase a car.
You’d be surprised by how easy it is to buy a car after you file bankruptcy. Within a week after you file bankruptcy, your mailbox will be full of offers from local car dealers who would be happy to sell you a car. Unfortunately, the interest rate you’re going to get will be obscenely high. The longer you wait to buy a car after you file, the lower your interest rate is likely to be.
If you decide you need to buy a car before you file bankruptcy, I’m going to tell you that you need to wait to file your bankruptcy for three or four months after you register your car with the Department of Motor Vehicles. If you file your bankruptcy before then, I can almost guarantee you that you will lose the car.
Talk To An Experienced Denver, Colorado Bankruptcy Attorney About How To Keep Your Car
Whether or not you’ll lose your car when you file bankruptcy can depend on a variety of factors and hiring a competent Denver, Colorado attorney can make a big difference when using the Colorado vehicle exemption. To learn more about whether or not Chapter 7 bankruptcy or Chapter 13 bankruptcy is your best option, schedule your free, confidential bankruptcy consultation with a bankruptcy attorney today. Our online scheduling system allows you to schedule bankruptcy consultation at a time that is convenient for you, or you can also call 303.331.3403. We have helped thousands of clients. We want to help you.