The Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy?

You can calculate whether you'll lose your vehicle in Chapter 7 bankruptcy if you know your state's motor vehicle exemption amount, the car's value, and the amount owed on a vehicle loan. The motor vehicle exemption protects your car, truck, motorcycle, or van equity. However, the exemption amount must fully cover the vehicle's equity. If it doesn't, the bankruptcy trustee responsible for managing your case can take your car in Chapter 7.

But that's not the only qualification you must meet. You can't file for bankruptcy on a car loan and keep the car without paying as agreed. If you don't pay the amount owed, the lender can use its lien rights to repossess your vehicle.

How to Keep a Car Using Chapter 7 Bankruptcy Exemptions

You don't lose everything you own when filing for Chapter 7 bankruptcy. You can keep "exempt" property needed to maintain employment and a household. Exempt property varies by state, but most people retain household furnishings, a retirement account, some home and car equity, and other necessary items.

So what happens to property you can't fully exempt?

In Chapter 7, you'll lose assets you can't protect with an exemption, known as "nonexempt property." The Chapter 7 bankruptcy trustee will sell your nonexempt property and distribute the money to creditors. Learn more about protecting property with bankruptcy exemptions.

Calculating Whether You Can Keep a Car After Filing Chapter 7 Bankruptcy

Follow these four steps to answer the "Can I file bankruptcy and keep my car?" question.

If you own the car outright, your calculations end here. If you have a vehicle loan, you must meet another requirement outlined below in "If You Have a Car Loan When Filing for Chapter 7, You Must Do This."

1. Check Bankruptcy Exemption Amounts

Your state's exemption statutes will tell you how much equity you can protect. Look for a motor vehicle exemption and a wildcard exemption that you can use on any property you choose. Some states will let you stack the two exemptions together. However, check the wildcard conditions carefully because some states limit wildcard use.

2. Determine Your Car's Value

In your bankruptcy paperwork, you'll report your vehicle's "fair market value," or the amount you can sell it for, considering its current age and condition. Check websites such as Kelley Blue Book and the National Auto Dealers Association for values. Your bankruptcy trustee will likely want a printout from one of the sites to prove your vehicle's value.

3. Calculate Your Car's Equity

You'll need to take any vehicle loan into account for this step.

• If you don't have a car loan, the equity is the same as the car's value. For instance, a vehicle worth $2,000 has $2,000 of equity.
• If you have a car loan, the equity is the amount remaining after selling the car and paying off the loan. For instance, if you sold the car for $10,000 and paid off a $5,000 loan balance, you'd have $5,000 of equity to put in your pocket. But if you owed as much as the car was worth, you'd have "zero" equity. A vehicle worth less than you owe would have "negative" equity.

4. Compare the Car's Equity to the Exemptions

If exemptions cover all your equity, you can file for bankruptcy and keep your car—the trustee can't sell it. However, the trustee can take your car in Chapter 7 bankruptcy if you have nonexempt vehicle equity.

Here's what the Chapter 7 trustee will do:

• sell your car
• give you the exemption amount
• deduct the sales costs, including the trustee's fee, and
• distribute the remaining amount to creditors.

Example 1. Kevin owes $5,000 on a "vintage" Corvette worth $7,000. Because his state will let him use the motor vehicle exemption to exempt up to $5,000 of vehicle equity, the Chapter 7 bankruptcy trustee can't sell Kevin's car ($7,000 value – $5,000 car note = $2,000 equity). Kevin can file for Chapter 7 and keep his car.

Example 2. Sonya owns a Harley worth $15,000, free and clear. But her state's motor vehicle exemption is $5,350, leaving $9,650 in unprotected equity. The Chapter 7 trustee will sell Sonya's Harley and, after deducting sales costs, recoup $9,250. The trustee will give Sonya the $5,350 exemption amount, keep the trustee's sales fee, and distribute the remaining proceeds to Sonya's creditors. They (the trustee and creditors) will take Sonya's car in Chapter 7.

Example 3. Hannah has car equity of $4,000 and can exempt up to $3,500 using her state's motor vehicle exemption. Because her state also has a $1,000 wildcard exemption, Hannah can protect her car by stacking the $3,500 motor vehicle exemption and $500 of the wildcard exemption. Hannah can keep her car if she files for bankruptcy.

Important note. Don't forget, if you have a car loan, you have another step. It's discussed in "If You Have a Car Loan When Filing for Chapter 7, You Must Do This."

Can I Keep a Nonexempt Car in Chapter 7 Bankruptcy?

It's possible in one of two situations: the trustee abandons the vehicle or allows you to repurchase it.

Abandons the vehicle. Abandonment happens when money isn't available for creditors after selling the property. The trustee must pay the loan, your exemption amount, sales costs, and the trustee's commission. If little or nothing remains, the trustee will abandon it. If you were current on the loan payment, you'd get to keep it. For instance, in Sonya's example above, if Sonya's Harley were worth only $6,000, the trustee wouldn't make enough to warrant selling it and would likely abandon it.

Agrees to let you buy the vehicle. You can file for bankruptcy and keep your car if you can afford to pay the trustee for the nonexempt vehicle equity. In Sonya's example, if she wanted to keep the Harley, she could likely negotiate a deal to pay the amount the creditors would receive minus anticipated sales costs. Many trustees simplify the process by letting filers pay 80% of the nonexempt equity amount. The trustee might even give Sonya a few months to pay.

If You Have a Car Loan When Filing Chapter 7 Bankruptcy, You Must Do This

Make sure your car payment is current before filing for Chapter 7. You can skip this step if you don't have a car loan. But if you have a car loan, the following information is crucial.

If you're behind on your vehicle payments, the lender can take back the car, even if you're in bankruptcy, and an exemption protects your equity. Why? Because the car secures the loan.

If you don't pay as agreed, the lender can use the lien rights to recover the vehicle by doing the following:

• filing a motion asking the court to lift the automatic stay so the lender can pursue repossession, or
• repossessing the car after the court issues the bankruptcy discharge and closes the case.

If you're behind on payments, you might have another option—redeeming the car. But it can be costly. You redeem a vehicle by paying the lender the car's market value in one lump sum payment, so if you owe more than the car is worth, this can be an excellent way to go. Many ask friends or family for help or use a lender specializing in bankruptcy redemptions.

Learn about surrendering a car in bankruptcy.

Keeping a Car in Chapter 7 Bankruptcy By Reaffirming the Car Loan

Many lenders will let you keep a car after bankruptcy as long as you're current on the payment and continue to make the payment after the case ends. The lender will give you the title when you pay the amount due under the discharged contract.

This arrangement works well because if the car breaks down or is in an accident, the filer can stop making payments and return the vehicle to the lender. However, without a contract, the payments aren't reflected on the filer's credit report, and the lender can repossess the car at any time.

Filers who don't want to risk losing the vehicle can sign a new contract called a "reaffirmation agreement." Although you might be able to convince the lender to agree to better terms, you should assume they'll remain the same because the lender isn't obligated to modify the loan. Therefore, while signing a reaffirmation agreement can help you keep a car in Chapter 7 bankruptcy, it isn't a tool you should rely on if you're behind on your payments.

Find out what happens to a car lease in Chapter 7 bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. For instance, Nolo articles will explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.