If you’re struggling with debt and considering filing for personal bankruptcy as a solution, you are likely worried about how this decision will affect your car. When you need your car to make your commute to work, run errands or pick up your kids from school and get around the city, you don’t want to lose it.
It’s true that you could lose your car after filing for bankruptcy, but that development isn’t set in stone. There’s a possibility that you could keep your car through the entire bankruptcy process. What happens to your car during bankruptcy depends on a variety of factors, like whether you’re financing it, leasing it or you’ve already paid it off.
Read ahead to find out exactly what these factors mean for the fate of your car.
What’s the Difference between Financing and Leasing a Car?
In both scenarios, you’re making regular payments to a lending company. The major difference between financing and leasing a car, however, is that with financing, you’re making those payments to own the car. Once you’ve completed the loan, the car is yours.
With leasing, you’re making payments to borrow the car — not to own it. You pay a car dealership monthly fees for as long as you intend to use the car. When you want to stop leasing it, the dealership will take the car back, end your payment plan and check if you owe extra funds based on mileage allowance, cleaning fees or damages. It’s not your property.
Cars and Personal Bankruptcy
One of the popular myths about personal bankruptcy is that you lose everything you own. That is not true. When filing for bankruptcy, you can expect a licensed insolvency trustee to collect some of your assets and sell them in an effort to repay creditors what they’re owed. One of the assets that a LIT could sell during the bankruptcy process is your vehicle.
If I declare bankruptcy, what happens to my car?
What happens to your car in a bankruptcy will depend on if you’ve financed, leased, or paid off your car.
When You Finance Your Vehicle
Can I keep my financed car if I file for bankruptcy?
Yes, you can keep your financed car if you file for bankruptcy.If your car loan is still on-going, then the licensed insolvency trustee will not touch your vehicle. The bankruptcy process deals with your unsecured debts. Since car loans are considered secured debts, they are exempt.
What happens to your car loan if you file for bankruptcy?
Technically, nothing should happen to your car loan if you file for bankruptcy — as long as you continue to make your monthly payments.
A creditor will not repossess your vehicle just because you’ve filed for bankruptcy. The Bankruptcy & Insolvency Act prohibits that action. As long as you can maintain your regular payments, you can maintain your possession of the vehicle.
That said, there are some exceptions:
- You will not regain your vehicle if the creditor repossessed it before you filed for personal bankruptcy.
- You will lose the vehicle if the creditor gave you notice that they intended to repossess it at least ten days before you filed for bankruptcy.
When You Lease Your Vehicle:
The same thing will happen with a leased car during a bankruptcy. As long as you can make your payments during the bankruptcy process, you can maintain your access to the vehicle.
Still, you may want to ask yourself if financing/leasing the vehicle is the best idea when you’re in a financially precarious situation. Remember, you’re not just making monthly payments to the creditor. You’re paying for insurance, gas, parking and much more to use a vehicle on a regular basis. Ask yourself if this financial commitment is essential. Is it possible for you to live without a vehicle to save some money?
When You’ve Paid Off Your Vehicle:
Once you complete a car loan, your secured debt is paid. The vehicle is now an asset under your ownership — which means that it could be collected and sold during your bankruptcy. It depends on the value of your vehicle.
Your vehicle is exempt from bankruptcy in Ontario if it has a net value of $6,600 or less. If your vehicle is appraised and meets this standard, you can keep it. If it has a higher value, then you have two choices:
- You can allow it to be sold as an asset for your bankruptcy.
- You can pay your trustee the portion of funds that crosses the exemption limit to maintain access to your vehicle. So, if your vehicle is worth $7000, you can subtract the exemption limit of $6,600 and pay the remaining $400 to your trustee.
It’s important to know that you can only do this with one vehicle. If you have two or more vehicles, you will have to choose one to keep in your possession and have the rest sold during the bankruptcy. Ideally, you should choose a vehicle that’s in good condition and within the province’s exempted value.
An Alternative to Bankruptcy
If the possibility of selling your vehicle makes you nervous, don’t worry. When you talk to a licensed insolvency trustee about your debt troubles, they will go over your personal finances to see whether you qualify for a consumer proposal. A consumer proposal is a popular alternative to filing for personal bankruptcy and an effective debt relief strategy.
A consumer proposal is a legally binding process that allows you to repay a reduced amount of your outstanding unsecured debts with the help of a licensed insolvency trustee. The good news is that you protect your assets from creditors with a consumer proposal — including your vehicle.
If you don’t qualify for a consumer proposal or a division one proposal, then you might have to file for personal bankruptcy to achieve debt relief. Book a consultation with one of our experienced trustees at David Sklar & Associates to find out what’s the best option for your situation. For more information, call us at 1-844-962-9200 or email us at [email protected].
Filing for bankruptcy doesn’t necessarily mean that you lose access to your vehicle. There’s a chance that you can keep your car and manage your debts at the same time.