How to File Bankruptcy and Keep Your Car

You can keep your car in bankruptcy if you can exempt all of the equity in it and stay current on your loan payments. If you can't meet both conditions, filing under Chapter 13—rather than Chapter 7—lets you use a repayment plan to protect nonexempt equity and catch up on missed payments while keeping your vehicle.

Two questions decide the outcome under either chapter:

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

Filing also triggers the automatic stay, which immediately stops most repossessions and collection calls while your case is open. Below, you'll find the scenarios that let you keep or lose your car, how to calculate your equity, and a quick shortcut for running the numbers yourself. (11 U.S.C. § 362.)

When You Can Keep Your Car in Chapters 7 or 13

You can keep your car in Chapter 7 or Chapter 13 if you can exempt all your equity and your payment is current, or if a Chapter 13 plan lets you catch up on what you owe. Read through each situation below to find the one that matches yours.

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. In Chapter 7, keeping a financed car usually means signing a reaffirmation agreement, in which you agree to remain personally liable on the loan in exchange for keeping the vehicle.

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. (11 U.S.C. § 722.)

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. Through a process called a “cramdown,” you may be able to reduce the interest rate on the vehicle loan and, if you bought the car more than 910 days (about two and a half years) before filing, reduce the principal balance to match the car’s current value. Any unpaid loan balance left after a cramdown is treated as unsecured debt in your plan. (11 U.S.C. § 1325(a).)

Learn more about keeping a car in Chapter 13.

Here are examples showing 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 truck's value is less than what she owes on it. Therefore, she has no equity to exempt. 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

Under these scenarios, you shouldn't expect to keep your car in Chapter 7.

Nonexempt Vehicle Equity

You’ll likely lose your car in Chapter 7 if you can’t protect all of the vehicle’s equity, but 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.

Unpaid Arrearages

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 to help you catch up on 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. 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.

How to Calculate Your Car's Equity in Bankruptcy

To calculate your car's equity in bankruptcy, subtract what you still owe on it from its fair market value, then check how much of that equity your state lets you exempt. Here's how to calculate vehicle equity for bankruptcy, step by step:

1. Determine your car’s value. Find out how much your car would sell for by checking NADA.org 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.”

Navigating Your Bankruptcy Case

Your car is one of your most valuable possessions. It's a good idea to speak with a lawyer to ensure you can keep everything you own before filing. Here are the articles that might interest you next.

• What happens to my paid off car in a Chapter 7 bankruptcy filing?
• Will I Lose My Checking or Savings Account if I File Bankruptcy?
• How to Value Your Car in Bankruptcy