If you don't have a car loan, whether you can keep your car in Chapter 7 bankruptcy depends on your car's market value and the amount of any motor vehicle exemption available to you.
In Chapter 7 bankruptcy, most or all of your debts are discharged. In exchange, the bankruptcy trustee is allowed to sell your nonexempt property and use the proceeds to pay your unsecured creditors. If the equity in your car is exempt, you can keep your car.
Here's how to figure out if you can keep your car in Chapter 7 bankruptcy.
Determine the value of your car. Find out the replacement value of your car. This is the amount you could get by selling your car given its age and condition.
Determine the amount of any applicable motor vehicle exemption. Each state has a set of property exemptions -- different types of property up to certain dollar amounts that are safe in bankruptcy. Almost all states have an exemption for motor vehicles. Some car exemptions are as low as $500 and some are as high as $15,000. If you have a wildcard exemption, you can add this amount to your motor vehicle exemption.
To find your state's motor vehicle and wildcard exemption amounts and to learn more about how exemptions work, see Bankruptcy Exemptions -- What Do I Keep When I File for Bankruptcy?
Do the math. If the applicable motor vehicle exemption is equal to or greater than the replacement value of your car, you can keep the car. If the applicable exemption is much less than the value of your car, the trustee will likely sell it.
If the exemption value is lower, but not significantly lower, than the replacement value of the car, you may still be able to keep the car. When the trustee sells the car, it must subtract from the sale proceeds the following: the exemption amount (the trustee will pay you this amount), the costs incurred in selling the car at auction, and the trustee's commission. If, after deducting all of these amounts there is little left over, the trustee is unlikely to sell the car.
To learn more about keeping your car in Chapter 7 bankruptcy, see Keeping a Non-Financed Used Car in Bankruptcy.
Updated by: Kathleen Michon, J.D.