What Happens to Your Car During Bankruptcy in Minnesota?

Filing for bankruptcy in Minnesota can be a daunting process, and many car owners wonder what will happen to their vehicles. Understanding the implications of bankruptcy on your car is crucial to making informed financial decisions. In Minnesota, your car is considered an important asset, and its treatment during bankruptcy depends on the type of bankruptcy you file.

There are two main types of bankruptcy individual filers usually consider: Chapter 7 and Chapter 13. Each of these has different implications for your car.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, most of your unsecured debts are discharged, giving you a fresh financial start. However, the process may affect your car depending on its value and your equity in the vehicle.

Minnesota has what is known as an “exemption,” allowing filers to protect certain assets, including a vehicle. As of 2023, filers can exempt up to $4,600 in equity for a car. This means if your car is worth $10,000, and you still owe $6,000 on it, your equity is $4,000, which falls within the exempt limit. Thus, you can keep your car.

If, however, your car’s equity exceeds the exemption limit, the bankruptcy trustee may sell the vehicle to pay off creditors. In these situations, it could be beneficial to consider your options carefully, such as reaffirming the debt on the car to keep it.

Reaffirming a car loan during Chapter 7 bankruptcy means you agree to remain liable for the debt, allowing you to keep your vehicle. However, be aware that this option makes you responsible for the debt even after your bankruptcy is complete.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed for individuals who have a regular income and wish to restructure their debts. In this case, you can typically keep your car while establishing a repayment plan to pay back your creditors over three to five years.

During this process, you will create a confirmed repayment plan that outlines how much you will pay for your car and for how long. If you're behind on car payments, Chapter 13 can offer a way to catch up on missed payments while keeping your vehicle.

Additionally, equity in your vehicle is also a consideration in Chapter 13. However, since you are not likely to lose your vehicle in this type of bankruptcy, the exemption laws apply differently. Your repayment plan will account for the equity you have in your car, and you may be able to adjust your payment terms accordingly.

The Importance of Understanding Your Options

Before filing for bankruptcy, it’s crucial to assess the value of your car, the amount you owe, and how these factors align with Minnesota’s bankruptcy exemptions. Consulting with a bankruptcy attorney can provide personalized advice based on your financial situation and help you make informed choices about your car and other assets.

Understanding what happens to your vehicle during bankruptcy in Minnesota is essential in safeguarding your assets and ensuring that you navigate the process as smoothly as possible. Whether through Chapter 7 or Chapter 13, being informed will help you take the necessary steps to protect your financial future.