How to File Bankruptcy Without Losing a Car

Learn how to use bankruptcy to get rid of your debts without losing your car.

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Whether you can keep your car in bankruptcy depends on the answers to these three questions:

(1) Are you filing for Chapter 7 or Chapter 13 bankruptcy?

(2) Are you behind in your car payments?

(3) Is the equity in your car exempt?

Keeping Your Car in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, most of your debts are discharged (cancelled). In return, you must give up nonexempt property -- the bankruptcy trustee sells the property and uses the proceeds to pay your unsecured creditors.

Whether you can keep your car in Chapter 7 depends on (1) whether your equity is exempt, and (2) whether you are behind in payments.

Is Your Car Equity Exempt?

Each state allows bankruptcy filers to keep certain types of property up to a certain dollar limit. Almost all states provide some type of motor vehicle exemption. The amount exempted varies tremendously -- it could be as little as $500 or as much as several thousand dollars (and sometimes much more if the car is outfitted for a disabled driver). To learn how much the motor vehicle exemption is in your state, see Bankruptcy Exemptions: What Do I Keep When I File for Banrkruptcy?

If your equity in the car (your equity is the market value of your car minus your car loan) is significantly more than the applicable motor vehicle exemption amount, the trustee may sell your car, give you your exempt portion, and use the remianing proceeds to pay your unsecured creditors.

In this situation, however, you may be able to use another exemption (such as a wildcard exemption) to make up the difference, get the trustee to accept other nonexempt property in return for keeping your car, or pay the trustee the amount of the nonexempt equity of your car. 

Are You Behind in Your Car Payments?

If you are behind in your car payments, you will lose your car in Chapter 7 bankruptcy (even if your equity is exempt) unless you take care of the arrearage or get the lender to agree to some other payment plan.

Some options include:

Redeeming the property. In Chapter 7 bankrptcy you can "redeem" a car by paying the lender the current replacement value of the car. You can only do this if the car is exempt or the trustee has "abandoned" the property (decided not to sell it). Because this requires a lump-sum payment, however, it's often not feasible for people considering bankruptcy.

Reaffirming the debt. You can keep the car if you and the lender sign a new payment agreement. You can changed the terms of your original contract in this agreement, but the lender has to agree. The downside: If you later default on the loan, you will be liable for the deficiency balance.

Keeping Your Car in Chapter 13 Bankruptcy

If you have significant equity in your car, or are behind in your car payments, it's often easier to keep your car in Chapter 13 than in Chapter 7.

In Chapter 13 bankruptcy, you keep your property and pay back some debts in full and others in part through a three or five year repayment plan. If you want to keep your car in Chapter 13 bankruptcy, you must keep current on your car payments. If you are behind on your payments when you file, you can pay off the arrearage through your Chapter 13 repayment plan. 

Chapter 13 also provides a means to reduce your car loan in certain circumstances (specifically, if your car is worth less than the amount of your loan). To learn more about this, see Can You Reduce Your Car Loan in Bankruptcy? 

by: , J.D.

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