One of the first questions clients ask me when they come into my office is what will happen to my stuff if I file for bankruptcy? More specifically what will happen to my car. Under Florida law when a debtor files for bankruptcy he or she is entitled to exempt $1,000 worth of equity in a vehicle, and an additional exemption if they don’t own a vehicle. What does that really mean? It depends on three different situations, whether you 1. Own your car outright, 2. Make monthly payments on your car, or 3. Lease your vehicle. Let’s start with the easiest one first:
Lease a vehicle – if you lease a vehicle you are basically renting a car, and in this case you have no equity in your car. So in a bankruptcy you can keep your leased car no questions asked. However if you file bankruptcy and you have a leased car that you don’t want to keep, you can surrender the vehicle in the bankruptcy and all the outstanding debt will be discharged. Additionally if you have more than one leased vehicle you are entitled to keep them in a bankruptcy if you want.
Finance a car – Typically when I meet clients in Miami that have financed a car they are upside down on the loan. Upside down means that the loan value exceeds the car value ie. Owe $14,000 on a car that is worth $9,000. If a client is upside on a vehicle they have no equity in a vehicle and thus they can keep it if they want. Again the client is able to return the vehicle in the bankruptcy if they wish.
Own a car outright – If a debtor owns a car outright, we first must determine what the vehicle is worth. To do this we take the make, model, mileage, and condition of the vehicle and we look up the value of the car on Kelly Blue Book. When looking at the Kelly blue book we average the trade-in value with the private party value to determine the value of the car. Under Florida bankruptcy law a debtor can only deduct $1,000 in a vehicle, so if the debtor’s car is worth $5,000 the debtor can only exempt $1,000 and will be liable for the additional $4,000. If the debtor cannot pay the additional $4,000 value of the vehicle the bankruptcy trustee is entitled to take the vehicle and sell it, return $1,000 to the debtor and use the rest of the funds to pay creditors. However if the debtor does not own a home or is surrendering their home in a bankruptcy they are entitled to an additional $4,000 in any goods. So in the case of a $5,000 car the debtor can use the $1,000 along with the $4,000 to fully exempt their vehicle in a bankruptcy.