Kentucky bankruptcy and your car

Will you lose your car if you file for bankruptcy in Kentucky? A very common question indeed and for good reason. After all, what good is it to shed burdensome debt if you’re left with no way to get to work? Kentucky bankruptcy laws allow $2,500 of equity in a motor vehicle to be protected as exempt, meaning the trustee cannot come after the property. Federal exemptions are also available to debtors filing bankruptcy in Kentucky and often afford greater protection than Kentucky bankruptcy laws, which is why Glasgow bankruptcy attorney, John Rogers, “almost always” uses the federal exemptions for his clients. Section 522(d)(2) of the Bankruptcy Code allows for a motor vehicle exemption up to $3,225.

How do these car exemptions actually work? Well, let’s roll up our sleeves and work through some examples.

Example 1 – Car owned free and clear

A car owned free and clear (no liens) has 100% equity, making the exemption analysis easy. Under federal exemption laws, a car worth $5,000 has $1,775 of non-exempt equity ($5,000 – $3,225). In this example, the $5,000 car would technically be subject to forced sale by the trustee, although, it’s likely that through your attorney a cash offer could be made to buy-out the non-exempt equity and retain the car.

Example 2 – Car Loan Balance Exceeds Value

Otherwise referred to as negative equity or being “underwater.” Cars depreciate in value quickly making this a common problem. The good news in the bankruptcy analysis is that there is no equity to protect, you can keep the car if you can afford the payments. If you cannot afford payments, surrendering the car is an option as well.

Example 3 – Car Loan With Non-Exempt Equity

For our final example, let’s discuss the scenario in which there is a loan on the car but the equity still exceeds exemption limits. If your car worth $15,000 is encumbered by a $7,500 loan, you have approximately $4,000 of non-exempt equity, which will raise the trustee’s eyebrows. In this scenario, there are two options. First, as mentioned previously, make the trustee a cash offer to buy-out the non-exempt value in the car. Trustees don’t really want to sell your stuff and are often willing to enter into this type of arrangement. On the other hand, if cash is a bit tight, you can allow the car to be sold. Once the sale goes through, you will be entitled to a check for the full amount of the federal exemption ($3,225).

See Also:

What Is the Rule With Cars and Bankruptcy?