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How are motor vehicles dealt with in bankruptcy? P.1

While some people are able to find ways to get by without a motor vehicle, most people require one to get to work, pick up groceries, haul around kids, and to generally take care of business.

One of the important questions in bankruptcy, then, is how motor vehicles are handled. The answer is different depending on the type of bankruptcy for which the debtor files.

Chapter 13 bankruptcy does not require liquidation of any assets to repay creditors, but relies on the debtor's ongoing income to complete a repayment plan established by the court. In this form of bankruptcy, then, a debtor is able to retain motor vehicles he or she may own, as long as any income going toward a motor vehicle payment is considered a reasonable expense. It should be kept in mind, though, that if a debtor ends up paying off a motor vehicle in the course of the repayment plan, the income that is freed up as a result of the payoff may trigger a modification in the repayment plan.

Chapter 7 bankruptcy, of course, works different than Chapter 13 bankruptcy. Rather than a debtor's ongoing income, Chapter 7 relies on liquidation of the debtor's assets to pay off creditors either in full or in part. Not all assets are subject to liquidation, but only nonexempt assets. Different states have different rules when it comes to bankruptcy exemptions, and this can affect how motor vehicles are deal with in the bankruptcy process.

We'll continue looking at this issue in our next post, and why it is important to work with an experienced bankruptcy law attorney when navigating the bankruptcy process.

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