Can I Keep My Car in Chapter 7 Bankruptcy?

Learn about exemptions, reaffirmation, and more to see if you can keep your car.

Most people need a car to commute to work, run errands, and get around town.  So being able to keep a car through bankruptcy is usually a priority for many.  Whether you are able to keep your car in a Chapter 7 bankruptcy depends on many factors including where you live and how much you owe on the car.  So let’s discuss these in detail below.

Exemptions 

A Chapter 7 bankruptcy is not intended to deprive you of all of your property.  Bankruptcy laws allow you to keep a certain amount of your property in order to make a fresh start.  This is accomplished through the use of exemptions.  Since most people need a car to get to work and live their lives, most exemption laws allow you a certain amount for a car regardless of where you live.  However, how much you can exempt depends on which state you live in.  Many states have a specific automobile exemption while others have more general personal property exemptions or "wild card" exemptions which can be used to exempt your car. 

For example, if you own a car worth $5,000 and your state allows a $6,000 car exemption, then you can keep your car.  However, if you live in a state that only allows a $2,000 car exemption (assuming no other exemptions are applicable) then the bankruptcy trustee may take your car and sell it. From the proceeds of the sale, the trustee will pay you your exemption amount of $2,000 and distribute the rest among your creditors. 

What If I Have a Car Loan? 

If you took out a loan to buy your car then your lender most likely has a security interest in your car (if you don’t make your loan payments it can repossess the car).  In most cases, bankruptcy does not change this security interest so the bankruptcy trustee is only concerned with how much equity (value of the property less the balance of the loan) you have in the car. 

So if you have a car worth $5,000 but you have a loan on it for $6,000 then you have no equity and you do not have to worry about the trustee taking it.  If you have equity, then you must look to your state’s exemptions to determine if you can keep the car.  However, if you wish to keep the car you must continue making your regular payments to the lender.

Reaffirming Your Car Loan

In addition to continuing your regular car payments, your lender may require you to “reaffirm” your car loan in order to keep the car.  Even though the car lender’s security interest in the vehicle is unaffected by your bankruptcy, a Chapter 7 discharge eliminates your personal liability on the loan.  This means that if you don’t make your payments, the lender can repossess the car and sell it but cannot sue you for any deficiency if the proceeds of the sale were not enough to pay off the entire loan. 

Because car finance companies would prefer that you be liable for a possible deficiency don't the line, they usually require you to sign a reaffirmation agreement (a new agreement to make yourself personally liable again on the loan) if you wish to keep the car after bankruptcy.  Reaffirming a car loan is not to be taken lightly since it means you'll be on the hook for a deficiency balance if you later default on your loan payments. Be sure to evaluate all of your options before deciding to reaffirm.

What if Available Exemptions Are Not Enough?

If you cannot fully exempt the value of your car, you may still be able to keep it.  If after deducting the cost of selling the car and the trustee’s fee there will be little or nothing left over for creditors, then the trustee will likely abandon (decide not to sell) the car.  For example, if your car is worth $5,500 and your state only allows a $5,000 exemption for your car, the trustee will probably let you keep it because there won’t be anything left over for creditors after the cost of selling it.  

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