Bankruptcy Can Affect Your Assets – Including Your Car
While filing for bankruptcy and completing the process can free you from most, if not all, of your debts, it’s not without consequences. Filing bankruptcy is a serious decision which can have outcomes that have long-term consequences. Plus, filing for bankruptcy may lead to the loss of certain assets, including a personal vehicle.
You may rely on your vehicle for getting to and from work and family-related purposes, so losing it could create plenty of problems.
We answer below the most common questions surrounding cars and bankruptcy, including:
- Will my car be taken away if I go bankrupt?
- Does bankruptcy eliminate car debt?
- Will alternatives to bankruptcy affect my car lease?
Bankruptcy: How Does it Work and What Types of Debts are Discharged?
Bankruptcy is a legal process available to individuals or businesses that are insolvent. To be insolvent, means the business or individual is unable to pay their debts as contractually agreed. When the bankrupt has completed the bankruptcy process, including their duties as a bankrupt, their debts are said to be “discharged.” Discharged debts are permanently eliminated and extinguished.
Of note, while most, if not all, unsecured debts can be discharged, secured debts are not discharged. A secured debt is a debt for which a lender has a mortgage or lien that permits them to seize and sell the mortgaged or leased asset if the borrower / bankrupt does not continue to make the required payments.
The following are examples of unsecured debts that are discharged:
- Credit card balances
- Unsecured lines of credit
- Unsecured personal loans
- Taxes, like income tax and HST
- Payday loans
Does Bankruptcy Discharge and extinguish Car Loan Debt?
Bankruptcy does not discharge a car loan if the loan is secured by way of a mortgage or lease on the car, you wish to keep the car, and you continue to make the required payments. If you cannot afford the car, or you do not wish to keep it, it can be surrendered to your Licensed Insolvency Trustee (LIT), who will then return it to the creditor to sell. The lender’s loss on the sale of the vehicle becomes an unsecured claim in the bankruptcy which can be discharged.
Will My Vehicle Be Taken Away…
…If I Own My Car?
If you own your car outright, it is not mortgaged or leased, will it have to be given up to the LIT overseeing and administering the bankruptcy? It depends.
In Ontario, a personal use vehicle may be retained if there is less than $7,117 of equity in it. The value is typically determined by reference to used vehicle guides and appraisals. The LIT will discuss this with you.
If the equity is more than $7,117, the LIT may permit you to retain the vehicle if you agree to pay to the LIT the equity in excess of the $7,117.
…If I Finance My Car?
As noted above, if your car is leased, or secured by the lender, you are already required to make the monthly payments to keep it. With or without bankruptcy, your car can be seized if the required payments are not made.
Can I Break A Vehicle Lease Or Car Loan In A Bankruptcy?
In consultation with the LIT, you will be able to decide what course of action to take with your vehicle. There are many possible outcomes: 1) If it is leased or secured, retain possession of it, and continue to make the required lease or secured loan payments. 2) If it is fully paid for, and it is worth more than the Ontario $6,600 exemption amount, keep the car and pay the value in excess of the $6,600 to the LIT. 3) If you no longer want or need the car, or you cannot afford it, you surrender it to the LIT who will, as appropriate, either sell it or return it to the lessor / secured lender to sell.
As noted above, if your car is leased or secured by the lender and, in consultation with your LIT, you decide to surrender possession of the vehicle, it will be sold by the lessor / secured creditor. The loss incurred will be an unsecured debt in your bankruptcy that will be discharged.
Can I Sell My Vehicle?
If your vehicle is exempt from seizure, worth less than the Ontario $7,117 exemption noted above, you may still wish to consider selling it. The expenses of ownership – gas, parking, insurance, repairs, will be eliminated. You will then have this money in your monthly budget to pay for other needs and expenses. Perhaps some savings!
The LIT will assist you in determining your personal needs and goals and preparing a detailed monthly budget, including what to do with your car.
What Happens to My Car If I File a Consumer Proposal?
A consumer proposal is an alternative to bankruptcy. A consumer proposal is a payment plan prepared by you and your LIT that is agreed to by your creditors. It permits a borrower to greatly reduce the debt and interest that must be paid. By making the agreed upon payments over time, no more than 5 years, a consumer proposal can dramatically improve your monthly budget and permit you to avoid filing for bankruptcy. A consumer proposal can also make it possible to retain assets that would be given up, surrendered to the LIT or secured creditor, in bankruptcy. This can include your vehicle, your house, or other assets you own such as a TFSA and RESP.
Filing for bankruptcy is a “last resort” solution to resolving unmanageable debt loads. While it provides enormous financial and emotional relief, it is not without costs and consequences, including the possible loss of your vehicle and other assets.
Fortunately, there are a number of options that may allow you to keep your vehicle. The Licensed Insolvency Trustee will help you understand and prepare for filing bankruptcy, and then work with and assist you throughout the process. They can also help you file a consumer proposal if that is the route you choose. Our team of experts at Baker Tilly can help you achieve debt relief no matter your situation.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals, couples and businesses, successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!