Most people who file for bankruptcy own or lease a car, truck, or motor cycle. A motor vehicle is often a necessity, so, if you are thinking about bankruptcy, you are probably concerned about the fate of yours. What happens to your motor vehicle in Minnesota Chapter 7 bankruptcy depends on whether it is fully paid for, financed, or leased. Here we examine the various possibilities.
Effect of Bankruptcy Filing
Upon the filing of the bankruptcy case, each motor vehicle that you own becomes the property of your bankruptcy estate.
Use of Exemptions
A court-appointed trustee oversees every Chapter 7 case. It is the trustee’s job to sell the property of the estate to pay back your unsecured creditors (those who don’t have a lien against a particular item of property). This is where exemptions come into play. Bankruptcy law allows you to exempt a portion of the equity in certain property from being liquidated and paid to creditors. The goal is to allow you to keep property that is essential for your livelihood such as means of transportation to work and a home.
There are both federal bankruptcy exemptions and state exemptions. Which exemptions can be used depends upon the state where the bankruptcy case is filed.
Choosing State or Federal Exemptions
In Minnesota, you can elect to use either the federal bankruptcy exemptions or the Minnesota state exemptions but not a combination of the two.
Currently, the Minnesota exemption for motor vehicles is $4,600 of equity in a single vehicle ($46,000 if the vehicle has been modified for reasons of disability) as compared to the federal motor vehicle exemption of $3,775 of equity in a single motor vehicle. Unlike the Minnesota exemptions, the federal exemptions have a so-called wild card exemption. It can be used in addition to or in combination with the federal motor vehicle exemption. The current federal wild card exemption is $1,250.00 of equity. Up to an additional $11,850 of the unused federal homestead exemption of $23,675, which applies to real property, may be combined with the federal wild card exemption for a total wild card exemption of $13,100. This means that you conceivably could exempt up to $16,875 in a motor vehicle by choosing the federal exemptions.
The federal motor vehicle bankruptcy exemption can be doubled for property jointly owned by a married couple. In other words, a married couple filing for bankruptcy would have a combined motor vehicle exemption of $7,550 aside from any wild card exemption.
Which exemption system – Minnesota or federal – you should elect will depend upon the nature of your assets. The federal homestead exemption of $23,675 of equity in a primary residence is not nearly as generous as Minnesota’s homestead exemption of $390,000 of equity in a primary residence ($975,000 if the property is used for agricultural purposes).
If you do not have any equity in your homestead, you may wish to elect the federal exemptions if the value of your motor vehicle substantially exceeds the Minnesota motor vehicle exemption or if you own a second motor vehicle that would have no exemption protection. You can use the federal wild card exemption of $13,100 on top of the federal motor vehicle exemption of $3,775 for a total exemption of $16,875 in a single motor vehicle. Using the federal exemptions in Minnesota bankruptcy cases makes sense only when you have either zero or very little home equity. If you have substantial home equity, Minnesota’s state exemptions should be elected so you can avail yourself of the state’s generous homestead exemption.
Minnesota permits a married couple who files a joint bankruptcy to separately claim exemptions. This means that if there are two motor vehicles, each spouse can use the full exemption of $4,600 per vehicle.
How the Motor Vehicle Exemption Works
Assuming you elect the Minnesota exemptions, this is how the motor vehicle exemption works. If the total value of a motor vehicle is equal to or less than $4,600, you may keep the vehicle and you do not have to pay any money to the trustee. If the value of the motor vehicle exceeds $4,600, you technically must pay any difference to the trustee in order to keep the vehicle. If the difference is relatively small, however, in practice, the trustee will abandon any claim to the vehicle and allow you to keep it. This is because the cost of selling the motor vehicle will be more than the net proceeds that will be received from the sale. To sell a vehicle, the trustee must hire a professional and obtain court approval, the cost of which, plus a commission to the trustee, is deducted from the gross proceeds of the vehicle’s sale.
Alternatively, if you have substantial nonexempt equity in the motor vehicle, you can opt to turn the vehicle over to the trustee. The trustee in turn then will sell the vehicle and out of sales proceeds pay you the value of the motor vehicle exemption, deduct his or her commission and costs of the sale, and distribute the rest to your unsecured creditors.
Motor Vehicle with a Loan
If you have a lien against your motor vehicle, there are four possible scenarios.
First, you can obtain a discharge of the debt and agree to relinquish the motor vehicle to the creditor. If you fail to return the vehicle, the creditor will need to file a motion with the bankruptcy court for permission to take the vehicle or wait for the bankruptcy case to conclude to proceed with repossession.
Second, you can reaffirm the debt by agreeing to pay the creditor what is owed in return for being allowed to keep the vehicle. Reaffirmation is a new contract that you enter with the creditor and which must be approved by the bankruptcy court. As a condition to approval of the reaffirmation, you have to show that you need the motor vehicle and that the payment to the creditor will not cause an undue hardship.
Your third option is to redeem the vehicle. In a redemption, you offer to pay the creditor a sum equal to the vehicle’s current fair market value in a single lump sum payment. The creditor must accept the lump sum payment even if fair market value is less than what you still owe for the vehicle. If you and the creditor cannot agree on fair market value, the court will decide the issue.
Most bankruptcy filers who redeem a vehicle don’t have enough cash on hand to make a single lump sum payment and have to borrow the money usually at high interest rates.
Finally, the bankruptcy trustee can sell the vehicle and pay off the lien to the financing creditor and the value of the motor vehicle exemption to you. In the majority of cases, however, the existence of the lien will deter the bankruptcy trustee from taking the vehicle and selling it. The reason is that after paying off the lien and the paying you the exemption value, there will be insufficient funds available to distribute to creditors once the costs of the sale are deducted from the sales proceeds.
Leased Motor Vehicles
A motor vehicle that you are leasing belongs to the leasing company and is not part of your bankruptcy estate. Your lease obligation is a debt that will be discharged in the bankruptcy unless you actively agree to assume the lease. If you reject the lease, you must return the vehicle to the lessor but you are off the hook for the remaining lease payments and charges.
It is not a good idea for you to assume a vehicle lease unless you are sure you can manage the lease payments.
Bankruptcy laws and exemptions are complex. It is important to hire an experienced bankruptcy attorney to help you make the right choices. To schedule a consultation with bankruptcy attorney Gregory J. Wald, call (952) 921-5802.