Bankruptcy in Colorado legally absolves the debtor of certain debts, giving them a fresh start. Most debtors file for Chapter 7 bankruptcy because it moves faster than other types. Chapter 7 liquidates non-exempt assets, such as second homes, second vehicles and jewelry, which a trustee sells to pay creditors. However, the debtor may wonder what happens to their primary vehicles in bankruptcy.
Equity and exemptions
Equity refers to the amount left after subtracting what the debtor owes from the current vehicle worth. If the debtor owns the vehicle outright, the equity is the current vehicle worth.
Most states allow debtors to exempt this amount, which is $7,500 in Colorado. The exemption amount increases to $12,500 for a disabled or elderly spouse or dependent.
Courts usually do not require the debtor to sell vehicles that don’t have enough equity to cover the loan. The debtor may not have to relinquish the vehicle, even with some non-exempt equity depending on value. Debtors could have the option of a wild card exemption, which lets them include a certain amount of a non-exempt property.
Redemption and reaffirmation
Some lenders allow the debtor to reaffirm the debt with the court, which means the debtor agrees to pay debt that otherwise would get discharged. If the court disapproves the agreement terms, the lender can repossess the vehicle. However, the lenders may also repossess the vehicle if the debtor refuses to sign the agreement.
Debtors have the option of redemption, or paying the full value of the vehicle in a lump sum. The debtor must file the motion to redeem with the court and include evidence of the current value. If the court approves the redemption agreement, the lender must accept the amount, which commonly falls below the loan amount.
Not all debtors qualify for Chapter 7, and bankruptcy law varies by state. A debtor should seek the services of attorney for more information.