How to File Bankruptcy and Keep Your Car

Everyone needs transportation to get to work, take children to school, attend medical appointments, and do other pressing errands. But your belongings—including your car—must meet bankruptcy requirements. We explain how your answers to these two questions will determine whether you can keep your vehicle in bankruptcy:

• Can I protect or "exempt" my car's equity?
• Will my car payment be current when I file?

If your answer to either of these questions is "no," a repayment plan in a Chapter 13 case might provide you with the means to keep your car and bring your payments current.

You'll also find a handy vehicle calculation shortcut at the end of the article.

When finished, consider exploring how bankruptcy works and learning other helpful things about bankruptcy. And check out our quick ten-question bankruptcy quiz—it can help you spot potential bankruptcy issues fast.

Keeping Your Car in Bankruptcy Starts With Calculating Equity

Everyone who owns a car and files for bankruptcy will need to calculate their vehicle's equity. Here's how to calculate vehicle equity for bankruptcy:

1. Determine your car's value. Find out how much your car would sell for by checking NADA.com and KBB.com. Vehicles in your area might be selling for more due to inflationary pressures so consider checking local car sales sites.
2. Subtract a vehicle loan balance. If you're paying for the car, deduct the amount required to pay the loan in full.
3. Don't subtract sales costs. You can't include sales costs when reporting property values on your bankruptcy paperwork. However, a Chapter 7 trustee will consider sales costs when deciding whether to sell property.
4. Determine how much equity you can exempt. Here's where things get tricky. All of the equity in your car won't necessarily be available to your creditors. Bankruptcy law allows you to exempt, or shield, some of that equity from creditors. So, you'll need to find the amount of your state's motor vehicle exemption and wildcard exemption. You can usually use both if needed. Also, check whether the federal bankruptcy exemptions are available in your state to see if you'd be better off using them. Here's where you'll find state bankruptcy exemption amounts.

All the equity you can protect is known as "exempt equity." Any portion not covered by an exemption is "nonexempt equity."

For example, let's say Robert can exempt up to $4,000 of equity in a motor vehicle and he owns a motorcycle with a value of $9,500. He owes the bank $7,300. When you subtract $7,300 from $9,500, you'll see that Robert's equity, or his ownership interest, is $2,200. Under state law, Robert can exempt up to $4,000 in equity. Because his equity in the motorcycle is less than the $4,000 maximum exemption available to him, his motorcycle will be safe if he files for bankruptcy.

When You Can Keep Your Car in Chapters 7 and 13

Read through each situation to determine the likelihood of keeping your car. You aren't likely to lose it if your situation matches one of the scenarios.

You can keep your car in Chapters 7 or 13 in these situations:

• You can exempt all your car equity and don't have a car payment.
• You can exempt all your car equity, you have a car payment, and both of the following apply: The vehicle payment will be current when you file, and you can afford to continue paying it after Chapter 7 or during your Chapter 13 case.

You can keep your car in Chapter 7 in this situation:

• If you can exempt all equity but are behind on a car payment, you can "redeem" the vehicle. You redeem a car by paying the lender an amount equal to the current replacement value. Usually, filers get the lump-sum redemption amount from a family member or a bankruptcy redemption loan lender. Expect the interest to be high.

You can keep your car in Chapter 13 in this situation:

• You can afford to pay for nonexempt equity and car payment arrearages in the Chapter 13 plan, and you can afford to continue making the monthly car payment. Learn more about keeping a car in Chapter 13. You'll find that you can reduce the interest rate on the vehicle loan and possibly the principal balance owed.

Here are some examples that show how equity and exemptions are applied in Chapter 7 and Chapter 13 cases.

Example 1. According to NADA.com, the retail value of Kayla's SUV is $12,500. She owes $9,200 on it. The equity is $3,300 ($12,500 – $9,200 = $3,300). Kayla's in luck. The vehicle exemption amount in her state is $4,200, more than what she needs to protect her $3,300 in equity. If she files a Chapter 7 case, the trustee will not sell her SUV. If she chooses a Chapter 13 case instead, she'll be fine as long as she continues to make her car payments.

Example 2. Hannah has been trying to sell her pickup truck for a few months. She knows that similar truck models are selling for $7,600. When Hannah decides to file a Chapter 7 bankruptcy case, the bank quotes her a payoff of $8,050. The value of the truck is less than what she owes on it. Therefore, she has no equity that needs to be exempted. The Chapter 7 trustee will not be interested in selling her truck. In a Chapter 13 case, Hannah could also keep her truck as long as she can afford the payments.

When You Might Lose a Car in Chapter 7

You'll likely lose your car in Chapter 7 if you can't protect all of the vehicle's equity. It will depend on how much equity is available to pay creditors.

Here's the test: If a reasonable amount would remain for creditors after giving you the exemption amount, paying off any vehicle loans, and deducting sales costs, the Chapter 7 trustee will sell the car. If not, the trustee won't waste time or effort selling your vehicle. Unfortunately, how much is "reasonable" depends on the type of vehicle, the jurisdiction where you filed your case, the trustee's practice, and even the state of the economy. A local bankruptcy attorney can help you figure out whether a trustee would likely sell your car to benefit your creditors.

You might also lose your car if you're behind on your car payment when you file for Chapter 7. The lien rights you gave the lender let the creditor repossess the vehicle when you fall behind, and Chapter 7 doesn't have a repayment plan provision that will help you catch up on the payments.

The creditor could file a motion asking the bankruptcy court to lift the automatic stay and allow the lender to proceed with repossession. Or, some lenders wait until after the Chapter 7 case closes.

Example 3. Darrin owns a sports car worth $27,000. After deducting the $17,500 balance on his bank loan, his equity equals $9,500. The state allows a motor vehicle exemption of just $3,000. That leaves a nonexempt portion of $6,500, an amount almost certain to interest a Chapter 7 trustee and creditors. If Darrin opted to file a Chapter 13 instead, he could keep the car, but he would pay the nonexempt portion of $6,500 to his unsecured creditors through his Chapter 13 plan.

Keep Your Car in Bankruptcy Calculation Shortcut

This shortcut will help you determine if you can keep a car in bankruptcy.

1. Figure out if you can exempt all of your vehicle equity.
2. If you have a car payment, determine whether it will be current when you file.
3. If you answer yes to the first question and don't have a car payment, Chapter 7 will meet your needs (but you might want to file for Chapter 13 for other reasons).
4. If you answer no to either of the first two questions, you could lose your car in Chapter 7 and should consider filing for Chapter 13.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

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.