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.

Can I Keep My Car in Chapter 7 Bankruptcy?

Yes, you can keep your car in Chapter 7 bankruptcy if your state's motor vehicle exemption--plus any wildcard exemption--covers all your vehicle equity. If your car is financed, you must also be up-to-date on your loan payments and remain so after bankruptcy.

Currently, the federal motor vehicle exemption is $5,025. (11 USC § 522(d)(2); valid until March 31, 2028.) State motor vehicle exemptions vary significantly (your state decides whether you must use the state exemption or if you can use federal bankruptcy exemptions instead. If exemptions don't fully protect your equity, you'll lose your vehicle.

How to Keep a Car in Chapter 7 Bankruptcy: Using 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 these assets 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.

Step-By-Step Guide: Can I Keep My Car If I File Chapter 7 Bankruptcy?

Start with the summary to get an overview of what you must do. Then follow the step-by-step instructions that follow.

If you own the car outright, your calculations will end after this section. 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."

Quick Checklist: Can I Keep My Car in Chapter 7 Bankruptcy?

You'll want to do the following things before filing for Chapter 7 bankruptcy.

• Check your state's motor vehicle exemption amount. Look up the current exemption limits in your state's bankruptcy exemption statutes.
• Get your car's current market value. Use sources such as Kelley Blue Book, NADA, or get an appraisal.
• Calculate your vehicle equity. Subtract the loan balance from your vehicle's market value.
• Compare equity to available exemptions. ICheck for available motor vehicle and wildcard exemptions.
• Ensure car payments are current. Catch up on any missed payments before filing to prevent losing your car in Chapter 7.

If your equity exceeds exemptions:

• Consider paying the trustee for nonexempt equity. Trustees will often accept 80% of unprotected amount to account for sales costs.
• Evaluate redemption options. If you can afford it, consider paying the lender the car's market value in a lump sum payment.

If you have a financed vehicle:

• Stay current on payments. This protects against repossession during bankruptcy as well as after.
• Decide on a reaffirmation agreement. This is a new contract that provides security but creates personal liability.
• Understand "ride-through" options. Some lenders will agree to accept payments without a reaffirmation agreement, but it comes with risk.
• Know surrender consequences. One benefit of surrendering a car in Chapter 7 is that it will eliminate a deficiency balance.

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, taking into account 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 equivalent to 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."

What Happens If My Car Isn't Fully Exempt 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.

Car Loan Requirements: What You Must Do to Keep Your Financed Vehicle

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.

Reaffirmation Agreements: How to Keep Your Financed Car After Bankruptcy

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.

Frequently Asked Questions About Keeping Your Car in Chapter 7

Below you'll find answers to common questions asked about cars in Chapter 7 bankruptcy.

What happens if my car has negative equity?

If you owe more than your car is worth, the trustee won't sell it because no equity exists that can be used to pay creditors. You can keep it if you remain current on the loan. However, the lender might require a reaffirmation agreement.

Can I stack multiple exemptions to protect my car?

Yes, many states allow you to combine or stack a wildcard exemption on top of a motor vehicle exemption to increase the amount of vehicle equity you can protect. For example, a $5,000 motor vehicle exemption and a $2,000 wildcard exemption would protect $7,000 in vehicle equity.

What if I'm behind on car payments when I file?

Being behind on payments puts your car at risk, even if exemptions protect your equity. The lender can request relief from the automatic stay, the order that stops creditors from collecting in bankruptcy, to repossess the vehicle. The best approach is to be current when you file. Other options include redemption by paying the car's value in a lump sum and surrendering the vehicle.

How do I calculate my car's equity for bankruptcy?

Car equity equals fair market value minus loan balance. Find the market value using Kelley Blue Book or NADA values and subtract the amount owed on your car loan. For instance, suppose your car is worth $10,000 and you owe $6,000. In that case, you have $4,000 of vehicle equity you'd need to protect with exemptions.

Do I need a reaffirmation agreement to keep my financed car?

Not always. Your lender might let you keep the car by continuing payments without reaffirming. However, reaffirmation provides more security by creating a legally binding contract between you and the lender. It can also help you rebuild credit because the lender will report the loan status to credit bureaus. Reaffirmation agreements require court approval if an attorney doesn't represent you.

What's the difference between federal and state exemptions?

Federal exemptions are set nationally, while state exemptions vary widely. If your state allows you to use federal exemptions instead of state exemptions, it's an all-or-nothing proposition. You must choose either federal or state exemptions because you can't mix exemptions from both sets.

Can the trustee abandon my nonexempt car?

Yes, the trustee will abandon the car if selling it wouldn't generate anything for creditors after paying the loan, exemption amount, sales costs, and trustee fees. If the trustee abandons it, you get to keep it.

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.