Can I keep my car if I file a Bankruptcy?

Fear of losing needed or cherished assets is one of the most common reasons why people are hesitant to file a Bankruptcy. And a motor vehicle is understandably one of the assets potential bankrupts are most fearful of losing. Unfortunately, there isn’t a universally black or white answer to this question. Here’s why.

Making sense of asset exemptions

Every province has specific rules about what a person can or cannot keep in their Bankruptcy. These are called asset exemptions, and they largely exist for two reasons:

1. To ensure the Bankruptcy process is not overly punitive on an unfortunate debtor who is actively seeking to address their financial difficulties
2. To provide a reasonable standard of living for a debtor and his or her family throughout and following the Bankruptcy process

The broad strokes of which assets are exempt and to what extent vary from province to province. However, these are universally expressed in dollar values rather than in tangible property. In other words, no province offers a carte blanche automotive exemption — rather each province allows for Bankrupt individuals to ‘keep’ a vehicle up to a certain dollar value (e.g. $6,500 in Nova Scotia).

If your vehicle is worth more than the designated exemption amount, you may enter an agreement with the Licensed Insolvency Trustee to pay the remaining balance in order to keep the vehicle.

Is the vehicle financed?

Asset exemptions as above are fairly straightforward when you own property outright. However, contractual agreements like a car loan or lease can complicate matters somewhat because you technically don’t own that property outright. Following are some common scenarios to be mindful of:

You’re in good standing with the lender when you file a Bankruptcy

Provided you are up to date with your payments and in compliance with the terms of your financing agreement (e.g. keeping the vehicle insured), you can often choose to keep the car and maintain your loan. However, you need to make certain to remain up to date on your payments as any default may cause the lender to repossess the vehicle and pursue any losses they incur.

You’re in poor standing with the lender when you file a Bankruptcy

If you are behind on your payments or have had a history of missing payments, the lender has the option to seize the vehicle when you file a Bankruptcy. If the lender fails to realize on the full value of your outstanding loan balance when they sell the vehicle, they may also file a proof of claim to pursue the remaining balance in your Bankruptcy.

You’re in poor standing with the lender before you file a Bankruptcy

You don’t necessarily have to file a Bankruptcy for your vehicle to be at risk of repossession. The lender has the option to repossess the vehicle any time you fall sufficiently behind on your payments or violate the terms of your financing agreement.

Just because you can doesn’t mean you should

It’s increasingly common practice to carry previous auto loans forward into new financing agreements. For example, imagine you purchased a car worth $52,000 in 2015 financed at 4.5 percent over 84 months (7 years). In 2020 you decided to trade that car in for an SUV worth $60,000. Rather than making you pay the remaining $8,600 from the original loan, your auto dealer instead offered to roll that balance into the new 84-month financing — making your purchase cost for the new car $68,600. 

At first glance, this can seem like a convenient and cost-effective solution, but it’s little more than a trap meant to keep you in a costly cycle of debt. For one, rather than being debt free in two years, you’re now locked into debt for another seven. Moreover, rather than paying 4.5 percent interest on that $8,600 over two years you’re now paying the same rate over seven years. And that’s assuming the dealer doesn’t try to lock you into yet another upgrade.

Break the cycle

Thanks to this practice, many Canadians find themselves with auto financing that is worth significantly more than their vehicle. And many find themselves paying on loans that far outlast the vehicle’s useful life. Bankruptcy may be the ideal opportunity to break free of this impossible situation. It would allow you to surrender your overpriced automobile back to the lender and eliminate that along with the other unmanageable debts in your life.

On the one hand, you’d have the peace of mind in knowing you’re no longer overpaying for a rapidly depreciating asset. On the other, you’d likely free up a fair amount of cashflow to begin saving for a more affordable second-hand vehicle that you could pay for with cash upon the conclusion of your Bankruptcy.