How to File Bankruptcy Without Losing 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?

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. 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 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." Keep reading to learn how exempt and nonexempt equity affect your ability to keep your car in bankruptcy.

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.

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 payment.

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.

When You Won't Lose a Car in Chapters 7 and 13

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

You won't lose 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 have a car payment, but you can exempt all your car equity, 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 won't lose 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 but expect the interest to be high.

You won't lose 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.

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 a Bankruptcy Case

Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

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 consulting with a local bankruptcy lawyer.