Most people can keep a car in Chapter 7 bankruptcy, which is important because retaining a vehicle is a top priority for almost all filers. But keeping your car in bankruptcy isn't guaranteed. Whether you'll lose your vehicle in Chapter 7 bankruptcy will depend on the following:
You'll also learn about redeeming an underwater car loan and when you might want to enter into a new contract with the lender called a "reaffirmation agreement." Learn about the differences between redeeming and reaffirming a car in Chapter 7 bankruptcy.
You likely know that the Chapter 7 bankruptcy trustee sells some property for creditors, but not all of it. Here's what you need to do to keep a car in Chapter 7 bankruptcy:
You'll find a detailed explanation of each requirement below. Learn more about property in bankruptcy.
It depends. The trustee can sell anything you can't protect in bankruptcy, including your car. The first step to figuring out whether you can keep your car is determining how much equity you have in your vehicle. Then check whether bankruptcy laws will cover all the equity.
You can calculate vehicle equity by subtracting the amount owed to a car lender from your car's value. Anything remaining is equity or the amount you'd keep if you sold your vehicle. Equity is an asset in your bankruptcy case.
need to protect the amount remaining with a motor vehicle exemption, a wild card exemption, or a combination of both.
Before you can keep your car or any other property in Chapter 7 bankruptcy, you'll need to cover the equity you have in the property with a bankruptcy exemption. The bankruptcy exemption laws help give you a fresh start by ensuring you have the things you'll need to work and live. You can save all "exempt" property or any asset protected by a bankruptcy exemption.
Because almost everyone needs a car to get to work, most states have a specific exemption to protect a modest car. "Motor vehicle" exemptions usually cover about $2,500 to $7,500 of vehicle equity, allowing you to keep a car with a reasonable but not excessive amount of equity.
Many states also have a "wildcard" exemption you can use to protect anything you like. Consider stacking the two exemptions if the motor vehicle exemption doesn't cover all of your vehicle's equity.
Most motor vehicle exemptions will cover cars, trucks, and motorcycles. A few states allow you to protect a single vehicle regardless of value; others have special exemptions for cars equipped for disabilities.
However, most motor vehicle exemptions limit you to a particular amount of equity. For instance, if your state's motor vehicle exemption is $7,000, you can protect a vehicle you own outright worth $5,000.
Many states have a "wildcard" exemption that you can use towards any property. A wildcard will be helpful when the motor vehicle exemption isn't enough to cover your car equity. In that case, you might be able to protect the entire amount using a wildcard exemption. Or a wildcard exemption might let you keep a second vehicle.
In Chapter 7, the trustee can't take exempt property but can sell your nonexempt property to benefit your creditors. Learn more about your property and exemptions.
It will depend on how much nonexempt equity is in the vehicle and whether you can reach a deal with the trustee.
If little remains for creditors after deducting the sales costs and the trustee's fee, the trustee will likely decide not to sell the car in a process known as abandoning the property.
If the car has a significant amount of equity and the trustee plans to sell it, some trustees will let you pay to keep your vehicle. For instance, the trustee might agree to give you a few months to pay for the equity minus what the trustee would have to pay in sales costs. Debtors usually use the income earned after the bankruptcy or get a loan from friends or family.
In Chapter 7 bankruptcy, here's what the trustee will do if there's enough nonexempt equity in the vehicle to sell it for creditors:
Example 1. Suppose you own a car outright worth $5,000, and your state allows a $6,000 car exemption. You can fully protect the equity and keep your vehicle.
Example 2. Suppose you have $5,000 in equity, but your state only has a $2,000 motor vehicle exemption and no wildcard exemption. The bankruptcy trustee will sell your car and pay you the $2,000 exemption. The trustee will disperse the rest to creditors after deducting sales costs and the trustee fee.
Even if you can exempt your equity, you'll face another hurdle if you have a car loan. You'll need to be current on payments. Find out when a lender can recover your car and other car loan options available in Chapter 7.
When you finance a car, the lender gets the right to recover the vehicle if you don't pay as agreed. The "lien" that gives the lender these rights doesn't go away in bankruptcy.
If your payments aren't current when you file, the lender can ask the bankruptcy court to allow repossession immediately. Or, the lender can wait until the automatic stay gets lifted when the Chapter 7 case ends. The reason the lender can do this is because of the lien rights.
Unlike Chapter 13, Chapter 7 doesn't have a mechanism to help you get caught up on a payment. Consider filing for Chapter 13 if you need to make up missed payments over time to keep the vehicle.
Example 1. Suppose you have a car worth $5,000 but still owe $6,000 on your auto loan. Because you owe more than it's worth and the lender gets paid first, the trustee won't take the car. You'll be able to keep it if you have current payments.
Example 2. Suppose your car is worth $10,000. You owe $4,000 on your car loan, but you're four payments behind. You'll need a motor vehicle or wildcard exemption of at least $6,000 to protect the equity and prevent the trustee from selling it. But the lender can still take the car back because of the late payments.
It's not uncommon to owe more on a car loan than it's worth. If you don't have any equity in your vehicle, consider "redeeming" your car loan. Chapter 7 redemption allows you to keep a car if you can pay the lender the car's value in one lump sum.
Learn more about redeeming a car for its actual value in Chapter 7.
In addition to making regular car payments, you might want to "reaffirm" your car loan by entering into a new contract. Why? Because Chapter 7 erases the agreement between you and the lender (but not the lien, as discussed above).
Even if your lender doesn't require a reaffirmation agreement, you might want to sign one if you're afraid of losing the car. Without a reaffirmation agreement, the lender can take the car back for any reason, even if you're current. And your payments won't show up on your credit report.
However, there are benefits to forgoing a reaffirmation agreement. You can return the car whenever you like at no cost, even if it needs significant repairs or incurred damage in an accident. Also, suppose the lender repossesses the vehicle and doesn't get enough at auction to cover the balance. In that case, without a contract in place, the lender couldn't sue you for the outstanding "deficiency" amount.
You'll want to know what you'll keep and what you'll lose before filing for Chapter 7 bankruptcy because once you file, you don't have an automatic right to back out of the case. A local bankruptcy lawyer can help by reviewing your qualifications and, if Chapter 7 is available to you, discussing what will happen to your property.
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.