Can you keep your motorcycle if you file bankruptcy?  Over the years I have learned that many folks value their motorcycle above all other possessions.  I recently caught the motorcycle bug myself and I am preparing to get my license as I write this blog post.

The answer to the above question depends on several factors.  First, in a Chapter 7 case filed in Nebraska, you may protect up to $4,900 of the equity in the motorcycle if you ride the bike to and from work on a regular basis.  If you are not employed or use another vehicle to travel to and from work, only $2,500 of the equity is protected.  When I say equity, I mean the difference between the value of the bike and amount of the motorcycle loan, if any.  For example, a motorcycle worth $10,000 that is subject to a loan of $6,000 has $4,000 of equity. 

Chapter 7 cases are liquidation bankrupties.  That means that if you have too much equity in the bike the Trustee will claim the bike and sell it to pay your debts.  If you have a 2010 Harley Davidson Fatboy that is worth $14,000 and there is no loan against the title, then the bike will be claimed by the Trustee.  Chapter 7 Trustee’s also will want to know if the bike has been modified and may ask how much chrome has been installed on the bike.  I’ve seen clients who have invested as much as $10,000 or more on aftermarket chrome or other assessories.  It is important that you tell your bankruptcy attorney exactly how much you think the bike would sell for and not hide the value of the accessories. 

Chapter 13 cases do not invole a liquidation so a paid off motorcycle is not at risk, however, whatever creditors would have received in a Chapter 7 liquidation must be paid out to creditors during the course of the Chapter 13 plan.  We call this the “best interest of creditors test” in bankruptcy court.

The tougher issue in Chapter 13 cases is presented when there is a sizable loan on the motorcycle and the bike is not a person’s primary sourse of transportation.  In general, bankruptcy judges dislike situations where a debtor proposes to fully pay a $10,000 to $20,000 motorcycle loan while other creditors are asked to accept 10 cents on the dollar.  This fails the “smell test.”  If you want to keep your “toy” then be prepared for the Chapter 13 Trustee to demand that you pay back a greater portion of your unsecured debt (i.e, credit cards and medical bills). 

The Chapter 13 Trustee frequently object to confirmation of a Chapter 13 Plan that pays a small portion of unsecured debt while a debtor proposes to keep motorcycles, campers, boats, and other nonessential secured debts.  I’ve even had difficulties getting the court to accept plans where a debtor agreed to work extra part-time jobs to justify the recreational vehicle.  Trustees often claim that such plans, even when extra jobs are assumed, lack good faith.  On the other hand, if the amount of the motorcycle loan is not too high, say, under $5,000, and a decent amount of the unsecured debt is being repaid, then debtors are allowed to keep those wonderful motorcycles.