Can the Bankruptcy Court Take My Car?

Find out what will happen to your car if you file for Chapter 7 or Chapter 13 bankruptcy.

A concern for people filing for bankruptcy is whether they will lose possessions—especially a car. Fortunately, you’ll likely be able to protect some or all of your vehicle equity. However, if you have unprotected equity that you can’t afford to buy back, or if you’re unable to bring (and keep) your car payment current, you might lose your car in bankruptcy. In this article, you’ll learn about your options in both Chapter 7 and Chapter 13 bankruptcy.

Can You Protect Your Equity?

Figuring out what will happen to your car in bankruptcy takes a few steps. But the process isn’t complicated. Here’s where you’ll start.

  • How much is your car worth? First, you’ll need to determine how much someone would pay for your vehicle. You can find the value using an online service such as NADA or Kelley Blue Book (find out which your court prefers). The service uses the year, make, and model of your car, as well as the mileage and the condition, to determine its worth.
  • How much do you owe on your car? The balance on a car loan also affects your calculations. The information should be on your monthly statement.
  • How much is your exemption? Most states allow you to protect (exempt) some equity in a car. You can use two types of exemptions to protect car equity: the motor vehicle exemption and a wildcard exemption (used to protect any property of your choosing). If your state has both, you can add the two together to protect more equity. Also, some states allow residents to choose between state exemptions and federal bankruptcy exemptions. However, you must pick one list and stick with it—you can’t mix and match between the two.

Once you’ve gathered your information, you’ll be able to determine the following:

  • How much equity do you have? The equity is the value of your vehicle minus the amount you owe on your car loan. If you don’t have a car loan, the equity is the value of the car.
  • Can you protect all of the equity? Compare the equity to the amount of your motor vehicle exemption.

Your equity is fully protected if the exemption amount exceeds the equity. What happens to a car with nonexempt equity depends on the bankruptcy chapter you file (more below). Keep in mind that you must make provisions for car loans, too.

Your Car in Chapter 7 Bankruptcy

If you have nonexempt car equity in a Chapter 7 bankruptcy, the Chapter 7 trustee appointed to manage your case can sell the vehicle, return the exempt amount to you, and use the nonexempt portion to pay creditors. Keep in mind that a trustee will have expenses associated with selling the car. For instance, the trustee must pay off any car loan and cover fees and sales costs. So if the nonexempt equity is minimal, a trustee usually won’t sell the car.

More tips:

  • Buying back nonexempt equity. A Chapter 7 trustee will often let the filer purchase nonexempt equity from the trustee and keep the car. Sometimes, you can get a discounted rate since the trustee won’t have to go through the hassle of selling it.
  • Cars with loans. If you’re behind on your car payment, it’s likely that the lender will repossess the vehicle once the automatic stay (the order preventing creditor collection activities) gets lifted. In either case, you’ll still need to make arrangements with your lender to keep the car. (Find out more in Reaffirmation Agreements in Chapter 7 Bankruptcy.)

Your Car in Chapter 13 Bankruptcy

A Chapter 13 trustee won’t take assets and sell them. You can keep all of your property—including nonexempt assets—but there’s a catch. You must pay for the nonexempt amount in your repayment plan (follow the steps above to determine whether your vehicle is fully exempt).

Also, if you have a loan on your car, you’ll have to continue making your payment if you want to keep it. Whether you’ll make your payment through the plan or directly to the lender will depend on the rules of your court. One of the benefits of a Chapter 13 case is that if you’re behind on your payment, you can include any past due amount in your repayment plan (and keep the car).

If you bought the car fewer than 910 days before filing your case, you'd have to pay the full amount that you owe, although you can probably lower your interest rate. By contrast, you’ll be able to pay the actual value of the car if you purchased it more than 910 days before your case, which can account for a significant savings. This is called a “cramdown.”

If you don’t want the car or can’t afford to pay for it, you can give it back to the lender. The lender will sell it and apply the sale proceeds to the balance. Any remaining balance will get paid with unsecured debts—such as credit card balances, personal loans, and medical bills—if funds are available to pay that category of debt.

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