The answer is yes—you can file for Chapter 7 bankruptcy and keep your car, truck, motorcycle, or van using your state's motor vehicle exemption. But if the exemption amount doesn't cover all of the vehicle's equity, the bankruptcy trustee can take your car in Chapter 7. To prevent losing your vehicle, you'll need to know:
Most importantly, you'll learn why you can't file bankruptcy on a car loan and keep the car without paying as agreed. If you'd like additional insight into your case, our quick, 10-question Chapter 7 bankruptcy quiz can help you decide whether Chapter 7 is the right choice or if you have a complicated issue that would benefit from hiring a bankruptcy lawyer.
You don't lose everything you own when filing for bankruptcy. You keep "exempt" property that you'll need to work and maintain a household. Exempt property varies by state, but most people retain household furnishings, a retirement account, some equity in a house and car, and more.
In Chapter 7, you'll lose nonexempt property—things you can't protect with an exemption. The bankruptcy trustee who manages your case will sell your nonexempt property and distribute the money to creditors
Follow these four steps to answer the "Can I file bankruptcy and keep my car" question.
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 of your choice. Some states will let you stack the two exemptions together.
In your bankruptcy paperwork, you'll report the "fair market value" of your vehicle—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 as proof of your vehicle's value.
You'll need to take any vehicle loan into account for this step.
If exemptions cover all of your equity, you can file bankruptcy and keep your car—the trustee and creditors can't sell it. However, if you have nonexempt vehicle equity, they can take your car in Chapter 7.
Here's what the Chapter 7 trustee will do:
It's possible if the trustee does one of the following:
Make sure your car payment is current before filing for Chapter 7. If you don't have a car loan, you can skip this step. 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:
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 a good way to go. Many people ask friends or family for help or use a lender specializing in bankruptcy redemptions.
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 give the car back to the lender. However, without a contract in place, 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 while the bankruptcy case is open 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 in any way. 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.
Learn more about your car in Chapter 7 bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below, you'll find more articles that can help you file bankruptcy and keep your car. And don't forget that our bankruptcy homepage is the best place to start when you need answers to other bankruptcy questions!
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Providing all information needed to file for bankruptcy is beyond the scope of this article. If you'd like to file without an attorney, consider buying a self-help book like How to File Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer J.D. to help you make well-informed decisions about your bankruptcy matter.
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