From time to time, I hear an anecdote from a client that reminds me that everywhere across the country, there are thousands of people who are not getting the fresh start they need because of misconceptions about bankruptcy.
The other day, I met with a fellow who was terrified that if he filed for bankruptcy, that he would lose his car, because a friend of his filed for bankruptcy, and she lost her car.
I explained to him that bankruptcy does not necessarily mean you will lose a car. In fact, losing a car because of bankruptcy is incredibly rare. Losing a car during bankruptcy (but not because of bankruptcy) is a little more common. There are still others who choose to voluntarily give up their vehicle in the course of a bankruptcy, though there is no mandate that anyone do so.
There are only two ways that someone can lose a vehicle in bankruptcy. And one of those ways doesn't really have to do with the bankruptcy at all.
First, you could lose a car if there is a secured loan on the vehicle and you have defaulted on the loan, resulting a repossession. This often occurs while someone is preparing to file for bankruptcy, but it certainly doesn't happen because of it. If you default on a secured loan payment, creditors have a right to repossess, whether you file for bankruptcy or not. Thinking that bankruptcy has anything to do with repossession is the classic post hoc, ergo, propter hoc logic fallacy. After this, therefore, because of this. In fact, the repossession had absolutely nothing to do with the bankruptcy, the timing just happened to coincide because the bankrupt debtor was struggling on all bills, car loans included.
The second way to lose a vehicle in bankruptcy is if the equity in the vehicle exceeds the allowable exemptions. Again, this is pretty rare. Most vehicles don't have equity to begin with. Most vehicles depreciate rapidly the moment you drive them off of the lot. Additionally, most people pay the minimum amounts on their vehicle loan. This ensures that throughout much of the life of the vehicle, the amount owed on the car exceeds the value of the car, creating no equity. By the time the debt is paid down enough to create equity, the car is several years old, has tens of thousands of miles on it, and is worth maybe a couple thousand dollars. At that point, Wisconsin residents enjoy pretty healthy motor vehicle exemptions whether they elect federal exemptions: $3,450, plus any remaining wildcard exemption (up to $11,975) using federal exemptions, and $4,000, plus any remaining household goods exemptions (up to $12,000) using state exemptions - and both numbers are doubled for joint filers.
Still, there are times where there are vehicles in excess of exemptions, such as people who have purchased a new vehicle recently with cash and have no loan against it, people with expensive large vehicles, or people who have a collection of cars of high or antique value. In these scenarios, it is possible that your exemptions will fall short of the equity you own. But even then, the trustee has to want to sell the car. In my experience, trustees don't like to sell stuff, particularly in today's economy. They prefer to liquidate non-exempt assets that are easier to move, such as real estate, cash, and cash-like items such as tax refunds.
And by the way - both of these problems (non-exempt equity or a default on a secured loan payment) can both be fixed by filing a Chapter 13 Bankruptcy instead of Chapter 7.
The moral of the story is that no two bankruptcy cases are exactly alike. How your bankruptcy case will unfold, how you will benefit, the extent of your relief, and the negative consequences you experience are highly contextual and dependent on the specific circumstances of your case.
It is important not to rely on the anecdotal evidence you hear from friends and family, who may not fully understand how or why certain things may have happened to them. Consult with an experienced attorney to find out exactly what bankruptcy will mean for you, so that you can make an informed decision and weigh the risks and benefits for yourself.