Though designed to help people who are overburdened with debt make a new start, filing for bankruptcy can be a bit overwhelming when the filing parties do not understand the procedures involved.
The motor vehicle exemption is one method that those who declare bankruptcy will find to be in their favor, and can be easily explained. This exemption can be used in both Chapter 7 and Chapter 13 bankruptcy, but is applied in different ways for each.
Chapter 7 Bankruptcy
When filing for Chapter 7 bankruptcy, the motor vehicle exemption can be used to protect a specific amount of equity in a vehicle. If the equity of the vehicle is less than the amount of the exemption, the vehicle is protected from being sold to pay creditors. For instance, in Hawaii, the motor vehicle exemption amount is $2,575. If the vehicle is worth only $2,000, the vehicle cannot be sold by the bankruptcy trustee. If the vehicle is worth $10,000, there are a couple of options.
- The first is paying the trustee the difference between the value of the vehicle and the amount of the exemption. In this case, the exemption amount of $2,575 would be subtracted from the equity amount of $10,000, which would mean paying the trustee $7,425 to keep the vehicle.
- The other option is for the trustee to sell the vehicle, give the debtor the $2,575 exemption amount from the sale of the vehicle, and use the rest to pay any unsecured creditors.
Some areas allow married couples who file for bankruptcy jointly to double the motor vehicle exemption. Hawaii is one of these states, and allows an exemption of $5,150 in these cases. One thing to remember is that though the exemption can protect your car from being sold by the bankruptcy trustee, is does not protect it from being repossessed from the car loan lender unless the loan payments continue to be paid.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy works differently, because instead of a trustee selling off the property that has not been exempt, it is designed to allow those filing to keep everything, and pay back only a portion of their debts with their future earnings. This is accomplished by meeting with a trustee and agreeing on a plan to repay some of the debts through monthly payments. The exemption in this case helps to determine the amount paid to any unsecured creditors. Income, expenses, property owned, and the amount of debts are also factors in determining the payment amount. The exemption is helpful in this situation because they help to lower the amount the debtor is required to pay their creditors.
State vs. Federal Exemptions
Some states allow you to choose either the state or the federal exemptions. This is helpful because the amounts may be different, which will help to determine which to choose. As stated above, Hawaii’s motor vehicle exemption is $2575. The current federal exemption amount is $3675. Depending on the amount of equity in the vehicle, it may be a better option to choose the federal exemption, especially if the vehicle is worth more than the amount Hawaii allows the debtor to protect.
When filing for bankruptcy, it is best to know every detail that can help you to keep as much property as possible, which is why motor vehicle exemptions are so important, so the debtor can begin to rebuild their credit in as comfortable a manner as possible.