What Happens to My Car in Bankruptcy?

This is a very common question we get from clients and prospective clients in Brooklyn, Queens, Staten Island and Westchester (car ownership seems to be lower among our Manhattan clients). The answer, like many things, involving the law, is that “that depends”. Is the car paid for, being financed, or is it being leased?

This is part of a three part series. In the first part we will address what happens if the car is paid for, in the second part what happens if the car is being financed, and in the third part what happens if the car is leased.

What Happens If My Car Is Paid For?

If someone files bankruptcy in New York and he or she owns a car outright the answer is pretty simple. They get to claim an “exemption” in the equity in the car (which currently is limited to $2,400). If the value of the car is
greater than the allowed exemption, in a chapter 7 case the chapter 7 trustee can demand that the debtor turn-over the car to the trustee — the trustee would then have an auctioneer sell it auction — and the trustee would pay the debtor his/her exemption and use the rest of the money to pay off creditors’ claims. If a car is jointly owned by a debtor and someone else (such as his or her spouse), then the debtor will only be entitled to 1/2 of the equity. If debtor and a spouse file a joint bankruptcy petition they can “double up” or stack their exemptions (i.e., $4,800 in one vehicle owned by them jointly or $2,400 in two vehicles total).

In chapter 13 a debtor can keep his or car even if the equity is greater than the allowed exemption amount as long as the value in excess of the exemption is distributed to creditors through the chapter 13 plan.