If you file for Chapter 7 bankruptcy, you can use your state's motor vehicle exemption to protect the equity in your car, truck, motorcycle, or van. But if the exemption amount doesn't fully cover the vehicle's equity, the bankruptcy trustee can take your car in Chapter 7. Here's what you'll need to know to prevent losing your vehicle when filing for Chapter 7 bankruptcy:
It's also important to understand why you can't file for bankruptcy on a car loan and keep the car without paying as agreed. Because if you don't pay what's owed, the lender can use its lien rights to repossess your vehicle.
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 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.
You'll need to take any vehicle loan into account for this step.
If exemptions cover all 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 vehicle 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 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.
Learn more about your car in Chapter 7 bankruptcy.
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