What is the bankruptcy exemption for an automobile?

Many persons contemplating bankruptcy wonder about the effect of filing a bankruptcy case on the car (or cars) that they own.

Starting April 1st, the federal bankruptcy exemption for equity in an automobile will be raised to $3400. (Until then, it is slightly less).

Please remember that this exemption only applies to your equity interest in a vehicle. If you owe more than the car is worth, there is no need to claim an exemption, and you can continue to drive the car as long as you are willing to stay current on the payments.

Automobile exemptions can be split up among two or more vehicles as the debtor sees fit — you could use $2200 of your federal allotment on one car, $500 on another, and so on. If the $3400 federal exemption isn’t enough to cover your equity, you can use some of your “wildcard” exemption to attempt to cover the rest. And married folks filing jointly get double the exemption amounts.

Problems tend to crop up when debtors choose to use state exemption schemes instead. The Massachusetts state exemption for an auto is a miserly $700, not enough to cover even a rusty jalopy.

So why would anyone choose the Massachusetts version over the federal? The most common reason is that they own real estate, and want to use the generous Massachusetts homestead exemptions to protect their home equity. Usually it is a smart idea to protect your investment in a home before worrying about a depreciating asset like a car, but the $700 Mass. limit sometimes forces debtors to pay their bankruptcy trustee the difference in order to keep driving. This is a situation that should be fixed by the Massachusetts legislature, but don’t hold your breath waiting for reform to emerge from that less-than-distinguished body.

Drivers using the New Hampshire state exemptions have it a little better; the auto exemption in New Hampshire is a more realistic $4000 in the Granite State.

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