What Can Happen If I Deliberately Underestimate the Value of a Car in My Chapter 7 Bankruptcy?

by Beverly Bird
Misrepresenting the value of your vehicle can result in a lot of headaches.

Misrepresenting the value of your vehicle can result in a lot of headaches.

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It's never a good idea to intentionally make a misstatement in a bankruptcy petition. The difference between an honest error and a deliberate underestimate of an asset's value can mean a criminal conviction. If the asset is your automobile, however, there's a chance that it may be safe from Chapter 7 liquidation even if you're honest about its value.

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Chapter 7 Exemptions

When you file for Chapter 7, everything you own at the time – including your car – becomes part of your bankruptcy estate. This is the property that the trustee can liquidate to raise money to pay your creditors. The law doesn't want to leave you with nothing when the bankruptcy process is completed, so it provides for exemptions that allow you to keep some assets. There are both federal and state exemptions. In some states, debtors must claim the local exemptions, but in others, they have a choice between either federal or state exemptions. The federal exemption for an automobile is $3,675 as of July 2013. If your automobile is legitimately worth $10,000 and you have a $6,500 loan against it, the trustee won't sell it if you apply the federal exemption because the exemption is greater than your equity. The sale would not result in any payment to your creditors. If your car is worth $10,000 and there's no lien against it, however, this leaves $6,325 in unprotected equity available for your creditors. The trustee will most likely liquidate the vehicle, but when he does, you're entitled to receive the exemption amount in cash. Only the balance of the proceeds can go to your creditors.

Misrepresentations of Value

Before the trustee collects your available property for liquidation, he must review your Chapter 7 petition. If you claim in your bankruptcy schedules that your $10,000 automobile is worth $8,000, the trustee may not realize that the number is wrong until he sells the vehicle. If it ends up bringing in $10,000, he'll be aware that your estimation was low. If you say the car is only worth $6,000, the trustee might notice the discrepancy right away. Trustees see a lot of bankruptcy schedules – most deal with 1,000 or more Chapter 7 cases each year. Unless you have a rare car that doesn't frequently appear in debtors' paperwork, the trustee will probably realize that the number you've given isn't accurate because it doesn't match up with other vehicles of the same make, model and year. The trustee might question you to find out how you arrived at the value.

Getting an Accurate Value

The law is clear that it's a debtor's responsibility to come up with accurate values for his assets, so you might want to do your homework regarding your car's true value. Check the year, make and model against any one of the auto price guides. Use the Internet to find out how much cars like yours are selling for in private transactions as well as at auction. Don't make comparisons with cars in poor condition if you've spent years waxing your hubcaps religiously and you've never missed a scheduled tune-up. If someone rear-ended you and you haven't repaired the damage yet, however, you can legitimately say that the vehicle is not in good condition and use the lower number.

Penalties for Misstating Value

Should you give in to the temptation to understate your car's value and if the discrepancy comes to the attention of the trustee, you may be subject to penalties. If your car is ultimately sold as part of your bankruptcy, you may not be entitled to get your exemption amount back. Worse, you could face federal criminal charges for bankruptcy fraud.