Keeping a Car When Filing Bankruptcy

Can I keep my car when filing for personal bankruptcy?”.

This is a common question and the answer depends on the circumstances…

If a car is owned outright by a debtor (i.e., it is not leased or subject to a loan), she can keep the vehicle if its fair market value is $5,650 or less. If it is more than $5,650, then the trustee shall be required to sell the vehicle. The Ontario Executions Act allows a debtor to keep one personal use vehicle so long as its value is less than $5,650.

If the car is a leased vehicle, then the vehicle doesn’t actually belong to the debtor. The car is actually property of the leasing company. The easiest way to confirm this is to look at the car ownership certificate. There are two portions to the ownership certificate: the owner portion (left side) and the permit portion (right side). If a vehicle is truly a leased vehicle, the name of the leasing company will be on the owner portion.

If the car is financed through a car loan, the trustee will need to determine if there is any equity in the vehicle. Here’s an example:

Example 1:

Fair market value of car        $7,000

Car loan balance                   10,000

Equity:                                    ($3,000)

In this case, the car has no equity. The trustee therefore has no interest in this vehicle. Since the loan is a secured debt, the debtor must keep paying the car loan if she wants to keep the vehicle.

Example 2:

Fair market value of car        $5,000

Car loan balance                     1,000

Equity:                                      $4,000

In this case, the car has $4,000 of equity. So you would think the trustee would have to realize the $4,000, right? Well, the actual answer is no. Remember that a debtor can keep a personal use vehicle if its value is less than $5,650. In this case, even though there is equity in the vehicle, its value is less than $5,650 and therefore, the debtor can keep the car.

Example 3:

Fair market value of car     $7,000

Car loan balance                  1,000

Equity:                                   $6,000

In this case, the car has $6,000 of equity. Also, its value is more than the $5,650 exemption limit. Therefore, the trustee must realize the $6,000 for the benefit of the debtor’s creditors. The trustee can sell the car, pay off the car loan and keep the rest for the benefit of the estate. The trustee can alternatively make arrangements for the debtor to keep the car if the debtor “buys out” the trustee’s interest of $6,000. For example, the debtor might be able to borrow $6,000 from her parents to pay to the trustee. Or, she may make monthly payments to the trustee so that the $6,000 is paid out over time.

This post should not be interpreted as legal advice or a legal opinion. Please consult your Fong and Partners Inc. advisor to review your own particular circumstances.

© Copyright Fong and Partners Inc 2010.

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