In Part 1 of Can I Keep My Car If I File Bankruptcy In Iowa we looked at five questions that must be answered each time we are looking at saving a car in bankruptcy. If you haven’t already read the previous post, you should take a moment and read it. Just to review, the five (5) questions are:
- How Many Cars Do You Own? (Really, read the other blog post. You may be surprised how many cars you “own.”)
- What are the Year, Make, Model, and Condition of Each of Your Vehicles?
- How Much Is Each Vehicle Worth?
- Are There Any Loans Against The Vehicles?
- Is There Equity in The Car?
In order to decide if you get to keep your car when you file for bankruptcy we apply one final test. That test is the:
Iowa Automobile Exemption
When a person files for bankruptcy in Iowa, all of his/her property (both personal and real) is subject to being liquidated in the bankruptcy estate. In order to keep property, the debtor must able to apply a legal exemption to the property. If an exemption applies, the debtor gets to keep the property. Since we are talking about automobiles, it is important to understand the Iowa Automobile Exemption. Iowa Code § 627.6(9) states that a debtor may exempt up to $7,000 of equity in one vehicle. In other words, each debtor gets to keep one vehicle with up to $7,000 in equity (Equity is the difference between what you owe and what it’s worth. Please, read the previous post…).
Let’s now take a look at a few real-life scenarios to see how the Iowa Automobile Exemption applies. In each scenario, the debtor will be filing a chapter 7 bankruptcy, single, and only own one car.
Model: PT Cruiser
NADA Value: $4,950.00
Outstanding Loan: $8,692.00
In this scenario, the debtor owns a vehicle that has negative equity, meaning they owe more for the car than it is actually worth (i.e., they’re “upside down”). The debtor has the right to keep making payments on the car, and as long as they do so, they may keep their car. Remember, the rule is each debtor gets to keep one vehicle with up to $7,000 of equity. In this example, the car has no equity (or, less than no equity, as it were).
Model: PT Cruiser
NADA Value: $4,950.00
Outstanding Loan: $0.00
The only difference between scenarios 1 and 2 is that in scenario 2 there is no outstanding loan. Once again, the rule is each debtor gets to keep one vehicle with up to $7,000 of equity. In this example, the car has only $4,950 in equity – which is less than $7,000. Therefore…you guessed it! They get to keep their car!
NADA Value: $19,200.00
Outstanding Loan: $18,352.00
In example 3 the debtor owns a car that is worth more than $7,000. Some people get tricked by this piece of information. But remember, we’re talking about equity here, not value. And in this example, the debtor only has $848 of equity so they get to keep the car.
As a side note, the debtor in this case decided to surrender the car because the payments each month were more than she could afford. Because her attorney (that’s me) set everything up correctly, she was able to drive the car for a couple of more months before giving it back. And because I didn’t have her sign a reaffirmation agreement, she wasn’t responsible for any additional amount due on the car after it was sold for only $9,000 at auction! (That’s a savings of over $9,000 for those of you keeping score.)
I think you probably get the idea about how the Iowa Automobile Exemption works. It really isn’t complicated.
So now I’ll complicate it. (I’m a lawyer – it’s what I do.)
What happens when a person owns a car that has more than $7,000 of equity? Well, if you’ve been following along you’re probably saying “Well, Sam, the exemption covers $7,000. If they have more than $7000 worth of equity, they’ll just have to give the car back.”
And you’d be right. Except that you’re wrong. But don’t feel bad, it was a trick question.
It is still sometimes possible for a person to keep their car even when the equity exceeds $7,000. That is based on the following considerations:
- Can any other Iowa Exemptions, in addition to the Iowa Automobile Exemption, be used?
- How much more is there than $7,000 of equity?
- Whose names are on the title to the vehicle?
Let’s take a look at one more scenario to see how these factors work. The purpose of this example is to show how an additional Iowa Exemption can be used to save a car.
NADA Value: $13,450.00
Outstanding Loan: $6,000.00
In this example we see that the debtor has $7,450 of equity in his/her vehicle. I did the math and that is more than $7,000. $450 more, to be exact.
Fortunately, there’s a thing called the Iowa Wildcard Exemption that we can use in this scenario.Iowalaw says that each person may exempt an additional $1,000 of property that is otherwise not exemptible. Even better, in the last few years the Iowa Legislature amended this exemption to allow for “stacking.” Stacking is where more than one exemption can be used for the same asset. More plainly stated, we “stack” one exemption on another to save a single asset (in this case, the car).
Because there is only $450 of additional equity in the vehicle, this problem is easy. The debtor merely “stacks” the $1,000 wildcard exemption on top of the automobile exemption. The result is that all the equity is exempted and the debtor gets to keep the car.
Once the wildcard exemption is used it cannot be used again. Normally this doesn’t matter but it is still worth noting because failing to understand this can lead to extreme disappointment when the trustee is taking someone’s property to sell.
There are factors that can lead to limitations as to what extent the wildcard exemption can be used. These limitations are not complex: However, they are too detailed to cover in this article. The attorneys at Marks Law Firm know how to evaluate the limitations and work around each. Contact us today to discuss your personal scenario and how we can help you get the maximum exemptions.
To summarize what we have covered so far:
- The Iowa Automobile Exemption applies only to equity in the vehicle
- The Iowa Automobile Exemption is limited to $7,000 per person
- The Iowa Wild Card Exemption can be used in conjunction with the Iowa Automobile Exemption
Coming up in part 3 of Can I Keep My Car If I File Bankruptcy, we’ll continue to cover what happens when there is more than $7,000 of equity in the car. Specifically we will look at the remaining issues of how much more than $7,000 of equity is in the car and considering how whose names are on the car affects the ability to keep a vehicle.
To learn more about being able to keep your car in bankruptcy, or for a free bankruptcy consultation, contact Marks Law Firm today. The attorneys at Marks Law Firm have the experience you need and can usually protect your interest in most of your assets.