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

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:

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

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.

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 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 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 the loan, your exemption amount, sales costs, and the trustee's commission. If little or nothing remains, 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 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. 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 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.

Need More Bankruptcy Help?

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.