Exemptions

• When you file for Chapter 7 bankruptcy, the bankruptcy trustee becomes the legal owner of all of your property that you own as of the date you file. At the end of your bankruptcy the trustee will return to you any property for which you can claim an exemption. Exemptions are available under either state or federal law. North Carolina does not allow you to elect between the state and federal exemptions; your only option is the North Carolina state exemptions, which provide a $3,500 exemption for motor vehicles.
  
  

Liquidation

• If your car is worth more than the $3,500 exempt amount then the trustee has authority to sell your car as part of the general liquidation process. The trustee uses the liquidation process to raise capital to pay off your debt. So, if your car is worth $6,000 and you claim the North Carolina exemption for $3,500 then the trustee will likely sell your car and give you $3,500 cash. You can use that cash to purchase a new car, or for any other purpose that you want.
  
  

Auto Loan

• If you have a loan on your car then you must add an additional calculation before you can determine what will happen to your car. The first thing you must calculate is the equity you have in your car. Equity is the difference between the current value of the car in the current outstanding balance on your loan. You then compare the equity to the exemption. So if you own a car worth $6,000 but you have a loan on the car for $4,000, then you only have $2,000 in equity, which means you can keep the car because $2,000 is less than $3,500 exemption.
  
  

Reaffirmation

• If you have a loan on your car and your equity is less than the exemption then you will keep your car only if you reaffirm the loan with your lender. When you file for Chapter 7 bankruptcy you will receive a discharge on all of your personal financial obligations that existed as of the date you filed for bankruptcy. This includes your auto loan. However, because the lender will still have a lien on your car, which is not discharged in bankruptcy, as a practical matter your loan still exists. If you don't pay your loan then the lender can exercise his lien by repossessing your car. Therefore, to keep your car after bankruptcy you will need to sign a reaffirmation agreement with your lender. Basically, the reaffirmation agreement states that you and the lender will both abide by the original auto loan agreement even after your bankruptcy discharge goes into effect.