Valuing Vehicles in Bankruptcy

Many people who are looking at filing bankruptcy have a car that they need to get to and from work, as well as to run errands and do every day activities. When talking about bankruptcy with an attorney, many people do not want to “claim bankruptcy” on their car, or worry about losing their car in bankruptcy. Generally, when you file bankruptcy in Kansas, you are able to keep your car, because there is a large exemption for the value of the equity in your car.

When you file a bankruptcy, you can “exempt” or keep certain items up to specific values. In Kansas, you are able to exempt your primary vehicle that you drive every day, up to $20,000 in equity value. If two people file, then each person can exempt their own primary vehicle, each with an equity value of up to $20,000. Equity means the value your car has above and beyond any lien that encumbers it. So, if your car is worth $30,0000, but you have a $20,000 car loan, then you only have $10,000 worth of equity and your car is protected. Assuming you are current on your payments, this is true for Chapter 7 or Chapter 13 (if you are behind on your car, you have options for catching it up in a Chapter 13 but not in a Chapter 7). If you have a car that is worth $5,000 that has no lien on it, then you have $5,000 in equity.

How are cars valued for bankruptcy purposes? Most bankruptcy courts have attorneys enter the debtor’s vehicle information into either the National Automobile Dealers Association or Kelley Blue Book databases and use the values that are presented. In at least one court in Kansas we start the valuation by using the Kelley Blue Book Private Party value for your vehicle, and assume it is in good condition. This gives a value range and a middle value. That middle value is used to value your vehicle.

What if your car is not in good condition? If your car has damage to it but is still running and able to be driven, attorneys will usually subtract some value from the Private Party value they pulled to estimate how much the car is worth. If the creditor or the trustee challenge this value, the attorney may get a third party appraiser to appraise your vehicle to get a more exact value.

What about cars that do not run? If you have a car that is not running, it is likely an extra vehicle that is not exempt since you are not using it every day. However, this is still an asset that needs to be valued. If the car is not running and needs extensive work, it is often given scrap value of around $250 to $500. If the car is some kind of collector model that needs work but still retains more value, it is valued accordingly by an appraiser or by looking at what cars of that style in similar condition are selling for.

Kansas has very generous car exemptions, which makes sense in a state where many people need their car to commute 30 minutes or more to work or even a grocery store! It is rare that people have more than $20,000 of equity in their daily driving vehicle, simply due to the high amount of use these cars get. As a result, it is rare that someone must give up their primary car due to its value in a bankruptcy. If you do have a car with substantial value beyond the exemption and want to keep it, you can look at filing a Chapter 13, which can allow you to keep non-exempt assets while still getting a handle on your debt.

In a bankruptcy case even though you are keeping your vehicle from the bankruptcy trustee (the trustee is not seizing and selling the vehicle) you may still need to pay any underlying loan against the vehicle.  The exemption you have in the case that protects the vehicle protects it from the bankruptcy trustee, not the bank that has a loan on the vehicle. 

In most Chapter 7 cases you will continue to pay on the loan against the vehicle after the case is filed.  In a few Chapter 7 cases you might be able to redeem the vehicle.  A redemption occurs when you pay the value of the vehicle to the creditor, usually in a lump sum, to obtain a lien release.  This is done through redemption financing in some cases by cashing out an exempt asset (like an Individual Retirement Account) after filing the case and using those funds to pay off the vehicle.  

In many Chapter 13 cases the value of the vehicle takes on additional importance because you are paying either the value of the vehicle through the plan or the loan amount, whichever is less.  These are usually cases where you have refinanced the vehicle since purchase or you have had the vehicle more than 2 1/2 years.  In these cases if the creditor does not agree to the valuation you have proposed and you cannot negotiate an settlement on the value a hearing must be held where the court will determine the value.  In those cases an appraisal will be needed so you can give the court an accurate valuation.  The bankruptcy judge will ultimately determine the value of the vehicle based on the evidence presented.

If you have any questions about bankruptcy or how it would impact your vehicle or loans against your vehicle please contact us and we will go over your specific facts with you.  Our attorneys have experience with thousands of cases and we have an appraiser we regularly use to value vehicles if there is a dispute.  We have offices in Wichita, Topeka, Lawrence and Overland Park.

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