Under federal bankruptcy law, a debtor may file for protection from creditors while a court oversees his financial affairs. In Chapter 7 bankruptcy, the debtor surrenders non-exempt property, which a court trustee then turns over for the repayment of debts. A Chapter 13 bankruptcy sets up a partial repayment schedule. State laws control certain issues in bankruptcy, including property that is exempt from seizure. The New York exemption schedule protects some equity in a car, but a debtor may still have to surrender it.
How Bankruptcy Works
A debtor who files for Chapter 7 bankruptcy lists all outstanding debts, including secured car loans. Bankruptcy law affects if and how the creditor and the court may satisfy these loans. A secured loan is a priority debt, and under certain conditions, the court has authorization to seize the collateral, sell it and use the proceeds to repay the lender. However, a bankruptcy debtor may be able to protect his car from seizure under the law covering exemptions. In New York, debtors may choose state or federal exemption schedules.
New York Exemptions
A bankruptcy debtor may keep his car in New York, where state law exempts $4,000 of equity in a vehicle. Using the federal exemption schedule, up to $3,675 of equity is exempt. New York also allows a $1,000 wild card exemption, which can be added to the vehicle exemption amount. If a husband and wife file bankruptcy jointly, then the exemption amounts are doubled under New York and federal law. If there is no loan outstanding and the car is worth less than the exemption amount, the owner can keep it. If there is a loan but the equity in the car is less than the exemption amount, the exemption still protects the vehicle. Surrender of the car would only be in the cards if the owner's equity exceeds the exemption.
Even if the exemption doesn't cover all of the debtor’s equity in a vehicle, he may still sign a reaffirmation agreement with the lender. Reaffirmation means he agrees to keep up on loan payments, and the creditor agrees not to seize the car as long as payments are current. Reaffirmation agreements are subject to court approval. In addition, if the court trustee has the right to seize the vehicle due to unprotected equity, the debtor can make a payment to the trustee equal to that non-exempt amount and keep the car.
Chapter 13 Bankruptcies
In a Chapter 13 bankruptcy, a court-appointed trustee sets up a repayment schedule to partially repay debts. This allows the debtor to keep his car, no matter how much equity he has in the vehicle. The court may allow a vehicle owner to reschedule an auto loan to extend the period of repayment and lower the monthly payment amount. Under certain circumstances -- and if the value of the car is less than the loan amount – a court in New York can "cram down" the outstanding loan balance to the market value. The debtor also may choose to surrender the car, which results in a discharge of the loan. In Chapter 13, however, a debtor who gives up his car may still owe a "deficiency" balance on the loan; the trustee may add a percentage of this balance to the monthly payments.