If you file for Chapter 7 bankruptcy, you will most likely be able to exempt (protect) some equity in your car, van, truck, motorcycle, or other motor vehicle. If you can exempt enough equity, you'll be able to keep your car.
Both federal law and most state laws allow bankruptcy debtors to exempt some equity in a motor vehicle when filing for Chapter 7 bankruptcy. This is often called the motor vehicle exemption. Some states require that you use the state exemptions; others allow you to choose between the state and federal exemptions.
Whether you can keep your car depends upon how much the vehicle is worth, how much you owe on it, and how much your applicable exemption amount is.
(To learn about exemptions, how they work, and which exemptions apply in your situation, see our Bankruptcy Exemptions area.)
If you do not owe any money on your car, your equity in the car is the car's value. To keep the vehicle, you must exempt most or all of your equity. If you are unable to exempt all of the car's equity, the trustee will determine if the nonexempt equity has enough value to the bankruptcy estate to warrant liquidating the car. If the trustee does liquidate the car, the trustee must pay you the full amount of your exemption from the proceeds.
Example 1. Your car is worth $3,000 and your state exemption law allows you to exempt up to $3,450 in motor vehicle equity. In this case, your car is fully exempt and the trustee cannot sell it.
Example 2. Your car is worth $10,000 but you can only exempt $3,450. You have $6,550 in nonexempt equity in the car. In this case, you may choose to pay that equity to the trustee to keep the car, or the trustee can sell the car, pay you $3,450, and use the rest (after deducting the cost of sale) to repay your unsecured creditors.
Example 3. Your car is worth $4,000 but you can only exempt $3,450, leaving $550 in equity. The trustee will likely decline to sell the vehicle because after selling the car, paying you the exemption amount, and deducting the costs of sale, there would little left over for your creditors.
If you owe money on your car, the same rules apply, but the amount of your car loan reduces the equity. For example, if your car is worth $10,000 but you owe $8,000 on the car loan, your equity in the car is only $2,000. If your exemption is $3,450, you have plenty of room to exempt all the equity in the car. If your car is worth $10,000 but you owe $12,000, you don't even need an exemption, because your car has no equity.
Keep in mind that even if your car is safe from the bankruptcy trustee, you will still have to pay your car loan if you don't want the car loan lender to repossess your car.
(To learn more about what happens to your car and car loan in both Chapter 7 and Chapter 13 bankruptcy, see the articles in Your Car in Bankruptcy.)
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