Options to Keep Your Car in Chapter 7 Bankruptcy

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).

Protecting Your Car Equity in Chapter 7

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:

• state exemptions
• the federal exemptions, or
• choose the set that works best for you.

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:

• sell the vehicle
• pay you the exemption amount
• reimburse sales costs and fees
• take a percentage as a fee for selling the car, and
• distribute the remaining funds to your creditors.

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.

Chapter 7 Options When You Have a Car Loan

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:

• Surrender the car. If you decide not to keep the car or you cannot afford the payments, you can surrender it (give it back). Surrendering the car will wipe out your entire debt liability. The creditor will either have to wait until your bankruptcy before repossessing the car or file a motion with the court asking the court to lift the automatic stay that prevents collection actions.
• Reaffirm the loan. If you reaffirm your car loan, you’ll sign a contract with the creditor agreeing to continue paying for the car and you’ll remain liable on the debt. If you sign a reaffirmation agreement, you’ll be bound by the agreement and liable for the debt, despite the bankruptcy discharge. As part of the process, you’ll have to show that you can afford the payment; otherwise, the court will disapprove the agreement, and the creditor will repossess the vehicle. (Learn more about reaffirming debt in Chapter 7 bankruptcy.)
• Redeem the car. If you choose to redeem the car, you must offer to pay the car lender the current market value of the vehicle in a lump sum payment. For instance, if you owe $8,000, but the car is worth only $5,000, you can pay a lump sum of $5,000 and wipe out the remaining $3,000 in your bankruptcy. If you and the creditor cannot agree on the value, the court will decide. This option makes sense if the value of the car is less than what you owe. (To learn more about how redemption works, see redeeming property in Chapter 7 bankruptcy.)

Find more about what happens to cars in bankruptcy in Chapter 7 Bankruptcy and Your Car.