You don’t have to give up all of your property when you file for Chapter 7 bankruptcy. If you own a car, you’ll likely be able to protect (exempt) a particular amount of the vehicle’s equity (each state’s law varies). If the equity value is worth more than you can protect, the bankruptcy trustee assigned to your case will likely sell it and distribute the nonexempt proceeds to your creditors.
Additionally, if you owe money on the car and would like to keep it, your loan will need to be current, and you’ll need to be able to continue making payments after the bankruptcy case. Also, you must indicate to the court whether you intend to reaffirm the debt, redeem the car, or surrender the car (more below).
When you file for bankruptcy, you can protect property that you’ll need to work and live by “exempting” it from your bankruptcy case. Each state decides the property its residents can keep (it will be listed in the state’s exemptions) and whether its residents can use the:
If you can exempt all of the equity in your car, you’ll be able to keep it. In fact, you’ll probably be able to keep it even if there’s a small amount of nonexempt equity because the car won’t be worth selling. In that case, the trustee will “abandon” it. (To learn more about how car exemptions work, and to find the motor vehicle exemption amount in your state, see The Motor Vehicle Exemption in Bankruptcy.)
If substantial nonexempt equity exists, however, here’s what the trustee will do:
Some trustees will allow you to pay the trustee for the nonexempt equity and keep the car. Usually, the price you’ll have to pay will be discounted by the amount the trustee saves in sales costs. You’ll have to use funds that aren’t part of the bankruptcy. Most people use post-filing earnings or get a gift or loan from a friend or relative.
You have a few other considerations that you’ll have to make if you financed the vehicle and are still making payments. First, you likely pledged the car as collateral when you took out the loan, making the loan a secured debt.
If you don’t pay the loan as agreed, the lender’s security interest, or lien, allows the lender to repossess the vehicle. Because filing for bankruptcy doesn’t get rid of the lender’s lien, if you want to keep the car, you’ll have to continue making payments or pay for the car another way.
And, as a practical matter, you should be current on your payments when filing because Chapter 7 doesn’t have a mechanism that will help you catch up on missed payments. If you can’t work out a deal with the lender, you’ll lose it to repossession. (If you’re behind and want to pay the arrears in bankruptcy, read Your Car in Chapter 13 Bankruptcy: An Overview.)
Here are some other options you’ll have in Chapter 7:
Find more about what happens to cars in bankruptcy in Chapter 7 Bankruptcy and Your Car.