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

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:

• your state's motor vehicle exemption amount
• your car's value, and
• the amount owed on a vehicle loan.

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.

How to Keep a Car Using Chapter 7 Bankruptcy Exemptions

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

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.

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 of your choice. Some states will let you stack the two exemptions together.

2. Determine Your Car's Value

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.

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 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:

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

Can I Keep My Car in Chapter 7 Bankruptcy By Paying for Nonexempt Equity?

It's possible if the trustee does one of the following:

• Abandons the vehicle. Abandonment happens when money wouldn't be available for creditors after selling the property. The trustee must pay off the loan, your exemption amount, the costs of sale, and the trustee's commission. If little or nothing would remain, the trustee will abandon it. You'd get to keep it as long as you were current on the loan payment. For instance, in Sonya's example above, if Sonya's Harley were worth only $6,000, the trustee wouldn't get enough to warrant selling it and would likely abandon it.
• Agrees to let you buy the vehicle. You can file 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. 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:

• 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 a good way to go. Many people ask friends or family for help or use a lender specializing in bankruptcy redemptions.

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 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.

Need More Help?

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!

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.