What if Your Vehicle is Worth More Than the Vehicle Exemption Allowed in a Chapter 7 Case?

If you file a Chapter 7 case as an Oregon resident, you can protect your motor vehicle up to the value of $3,000. But what if you really need to file a Chapter 7 case but your vehicle is worth more than that?

Although bankruptcy is based on federal law, each state is allowed to use its own property exemptions—its list of property that a person filing bankruptcy can “exempt,” or protect. Oregon has exercised that option. So Oregon Revised Statute 18.345(1)(d) provides an exemption for a “vehicle to the value of $3,000.”

But before going any further let’s be clear about some ground rules for this exemption:

1. We’re talking here about the amount of EQUITY in the vehicle you need to protect. So if you owe on a vehicle (and the creditor you owe is a lienholder on the vehicle’s title), then subtract the debt amount from the value of the vehicle to calculate the amount of equity. If the equity is less than $3,000, then your vehicle is protected.

2. You and your spouse are EACH entitled to a $3,000 vehicle exemption, so if you are both filing bankruptcy and have only one vehicle, you can stack your two exemptions onto one vehicle and protect up to $6,000 of value (or equity) in that vehicle. That’s true even if together you own two vehicles, but one of the vehicles has no equity (because you owe on it more than it’s worth)—you can still stack both of your exemptions on the vehicle with equity, as long as you are both owners of that vehicle.

3. If you are one of the owners of a vehicle along with someone else (such as a spouse) and you are filing bankruptcy by yourself, you can claim your $3,000 vehicle exemption on YOUR SHARE of that vehicle. So if you are a half-owner of a vehicle worth $6,000, your share is worth $3,000. Since your share is all that is under the jurisdiction of the bankruptcy court, and it is protected, that means that the entire vehicle is safe.

But what if you still have too much equity in your vehicle? Here are your options:

1. You could file a Chapter 13 case instead of a Chapter 7 one. Chapter 13 is designed to enable you to keep an asset which a Chapter 7 trustee would be able to take from you because it exceeds its allowed exemption. When you come in to see us, we will talk with you about the advantages and disadvantages of these two Chapters.

2. Assuming that you still need or want to file under Chapter 7, one option is to pay the bankruptcy trustee to avoid the vehicle being taken from you. The trustee generally is willing to not take your vehicle if he or she gets paid by you the amount that would come from selling it. Both sides just need to agree on the value of the vehicle—the amount the trustee would have likely received through a sale, and then arrange to pay that amount, doing so fast enough to satisfy the trustee.

3. There’s also the option of simply surrendering the vehicle to the trustee. Most people need to keep their vehicle(s), but in some situations giving up the vehicle makes sense. It may no longer be important to the debtor—such as a business vehicle after the closure of the business. Or the debtor might have some alternate means of transportation and does not want to file a three-to-five-year Chapter 13 case merely to keep the vehicle. Sometimes this option makes more sense if the money distributed by the trustee from the vehicle sale is projected to go mostly to debts that the debtor wants paid anyway, such as support arrearages or taxes.