The first question that you will be asked is what is your car worth. To determine this you'll need to have the vehicle appraised. Most Licensed Insolvency Trustees will accept an independent value of opinion — that is, someone who's qualified to sell cars or value cars, that is not related to you or a friend, that is willing to write out a letter indicating what they believe the fair market value of your car is. Fair market value is the amount that someone (not related to you) would pay for your car.
The second question will be "do you have clear title to your car"? Clear title means that there are no liens or other claims to your car. (A "lien" is the technical term for pledging your car as security for a debt.)
What if there is a lien or other claim to my car?
This discussion is easier to understand if we use an example:
ABC Finance Co. loaned you $5,000 to consolidate your bills and secured their debt by registering a 'lien' on your car. Two years later you file bankruptcy. You still owe ABC $3,500, but your car is only worth $1,500?.
When you file bankruptcy, ABC will be required to prove to your trustee that they have a valid claim and that it ranks in priority to any other claims on your car. If they do, your trustee will "release" the car to ABC. (By 'releasing' you car to ABC, the trustee is saying that ABC has a legal right to your car should you fail to make your payments.)
ABC will then request one of the following:
If your car is worth approximately what you owe ABC then they will probably ask you if you wish to continue making your regular payments;
If, as in our example, your car is worth less than the amount that you owe ABC you will have to negotiate with ABC to pay them the fair market value of the car; or
ABC has the right to seize and sell your car.
What if I owe more than the fair market value of the car?
Using the example set out above, when you filed bankruptcy you owed ABC $3,500 and your car was worth $1,500. Under the terms of your bankruptcy, you are required either to pay ABC $1,500 (the fair market value of your car) or surrender to them your car.
Keep in mind that ABC is within their rights to request the full $1,500 as soon as the trustee releases the car, or they can negotiate payment terms with you — it's up to them and to you to reach an agreement. If you are having difficulty reaching an agreement, your trustee may be able to assist with the negotiations, but in the end, it's up to you and ABC to make a deal.
What happens to the rest of the debt?
To continue using our example, after you've 'settled' with ABC on the car, they are still owed $2,000. (To 'settle' with a creditor means, 'to make a deal with'.) What happens to the $2,000? Well, it's an unsecured debt and therefore taken care of in your bankruptcy (i.e. you don't repay it).
If you're still unclear about what happens to your car when its value is less than the amount that you owe the creditor whom holds the lien on it, call your trustee for a more detailed explanation.
What if the fair market value of my car is more than what I owe?
In the case where your car has a fair market value that is higher than the debt that you owe, your trustee will not release the item to the secured creditor. Instead, your trustee will determine the "net worth" of the item (the fair market value less the amount of debt owed). You will be required either to pay the trustee that amount (as well as continuing to pay the secured creditor what they are owed) or the trustee will seize and sell the item. Most Trustees will negotiate payment terms that allow you to pay the net worth of an item over the course of your bankruptcy.
What happens if there are no liens or other claims to my car?
If you have "clear title" to your car and you file bankruptcy then you will be required to pay the trustee the fair market value of your car in excess of $5,000 if you want to keep it. If you are unable or unwilling to pay for the car then the trustee is required by law to seize and sell your car on behalf of your creditors. Again, most Trustees will negotiate payment terms that will allow you to pay for the car over the term of your bankruptcy.
Effective April 15, 2001 in Ontario, a bankrupt is permitted to keep one motor vehicle worth up to $5,000. (Prior to April 15, 2001, when the law changed, regardless of the value of the car, the bankrupt had to surrender the vehicle, or pay its fair market value to the trustee).
Recent court decisions state that if you own a car worth $5,001 the car is not exempt, and you must surrender it to the trustee. We encourage you to discuss your car questions with us prior to declaring bankruptcy.
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