The attachment that most Americans have for their car is reflected when people consider bankruptcy, frequently one of the first questions they ask us “Can I keep my car if I file bankruptcy?”
Filing For Bankruptcy
Bankruptcy is an incredibly powerful tool to relieve debt in the USA. It will allow a clean slate and remove the pressure of debt from the one who files.
Pros of Bankruptcy
The moment that you file for bankruptcy, you will no longer have people calling at your house and phoning you about your outstanding debts. No further collection actions can be taken. As soon as bankruptcy is filed “Automatic Stay” kicks in and stops any more actions.
Security Of Future Wages
Once the bankruptcy under Chapter 7 is filed. Your wages cannot be touched by creditors They are under your control completely.
Never Again Can Your Creditors Chase You
Once you are discharged from bankruptcy, you are protected from most creditors attempts to get money from you. There are a limited number of cases, such as alimony, and recent tax bills, that are the exception.
Keep Most Of Your Property
Many people have a picture of a furniture truck turning up and emptying your home when you become bankrupt. The reality is that exemptions protect most of your assets. Whilst some luxury items may be lost, it is nowhere as bad as you might imagine.
Very Little Stigma
Perhaps there may once have been a time where society looked down upon bankrupt individuals. In today’s economy bankrupted individuals are seen more as victims, especially since the pandemic.
Cons Of Bankruptcy
Everybody Can Look Up Your Bankruptcy
The court’s bankruptcy docket is in the public domain and can be viewed by anyone. However, the fact is that very few people ever check this.
The Means Test
To file Chapter 7 bankruptcy is not available to everyone, you will have to go through the “means test” to check you qualify. In Texas, most people will pass this.
Any item not protected by an exemption will be sold by the trustee. In the State of Texas, exemptions are very generous and the amount sold may be quite limited.
Your Credit Rating Will Be Shot
If you have a great credit rating now, that will no longer be the case after bankruptcy. However, those with a low rating, perhaps under 600, may find that bankruptcy allows them to quickly raise their credit rating to 800.
Can I Keep My Car If I File Chapter 7 Bankruptcy?
The State of Texas has one of the most consumer positive bankruptcy laws anywhere in the USA. An example of this is that car drivers will have one car exempted/protected. Even if you cannot drive, if you need someone else to drive the car for you, that will also be protected. The protection of motor vehicles applies to one car per person, not a family.
Federal law states that you can have a car exempted up to $3,775. The Texas law protects the entire value of one car per family member. This is a very generous exemption.
Exemptions In Texas
When you file Chapter 7 bankruptcy in Texas, everything you own is placed into what is called the bankruptcy estate. That is the starting position, but then you have exemptions, which are items of property you can keep without paying for them. As I have said already, in Texas those exemptions are very generous. In fact, most people who file Chapter 7 in Texas are able to keep everything using exemptions.
In addition to the cars, motorbikes, and tricycles, Texans can exempt sporting equipment, and this includes two firearms, as well as bicycles. Your home furnishings, which may include heirlooms, your clothes, and jewelry (must not be over 25% of the exemption).
Pensions are quite often exempt as well as most life insurance policies. The biggest exemption of all is the homestead exemption, but that will be covered in another article.
Chapter 13 Bankruptcy
So far, I have concentrated on Chapter 7 bankruptcy. Another form of bankruptcy you may consider is Chapter 13 bankruptcy. Bankruptcy is a complex legal proceeding. If you can, it is always beneficial to seek counsel. The difference between Chapter 7 and Chapter 13 bankruptcy is primarily that:
Chapter 7 Bankruptcy: does not need a repayment plan but you are required to sell any non-exempted property, so creditors can be repaid.
Chapter 13 Bankruptcy: eliminates what is referred to as qualified debt over a three to five-year period.
If someone fails the means test in Chapter 7, chapter 13 bankruptcy may be an option. Chapter 13 works for people who have enough money to pay some of their debts but not all. Typically, during Chapter 13 bankruptcy, only a part of the total debt is paid off. Any priority debts and taxes are usually paid in full, but debts like credit cards and medical bills are only partly paid. Upon completion of the Chapter 13 repayment plan, any remaining debts are wiped off. Completion usually will be achieved in three to five years.
In Chapter 13 you keep your property. If all your property is exempt, it straightforward, you get to keep it without penalty. If it is non-exempt then you pay your creditors for it in your payment plan which will take all your disposable income (the amount of income left after you have covered allowed expenses for living costs).
Chapter 13 allows the individual to catch up on any debt payments (like on your car) and spread the missed payments over the period of your repayment plan. This stops your creditor from repossessing your car during the repayment period. When the repayment plan is completed, you will be up to date with your payments.
If you do not continue making these payments during the period of your repayment plan, the creditor can apply for a “lift of stay” and repossess the vehicle.
Where possible, it is advisable to seek advice about the correct type of bankruptcy to file.
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