How to File for Bankruptcy and Still Keep Your Car

 Filing for bankruptcy is a major financial decision that can offer relief from overwhelming debt, but it can also feel like a daunting process, especially if you own assets you don’t want to lose. One of the common concerns among individuals considering bankruptcy is the fate of their car. For many people, a vehicle is not just an asset but an essential part of their daily life—whether for commuting to work, running errands, or taking care of family obligations. The good news is that it’s often possible to file for bankruptcy and still keep your car, depending on your situation and how you file.

In this guide, we’ll walk you through the different types of bankruptcy filings, explain how the process works, and explore ways you can protect your car during bankruptcy proceedings.

Understanding Bankruptcy: Chapter 7 vs. Chapter 13

Before we dive into how you can keep your car during bankruptcy, it’s important to understand the two main types of bankruptcy filings available to individuals: Chapter 7 and Chapter 13. Each chapter works differently and has distinct implications for the assets you can retain, including your vehicle.

Chapter 7 Bankruptcy: Liquidation

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is the most common form of bankruptcy for individuals. Under Chapter 7, most of your unsecured debts (such as credit card bills, medical bills, and personal loans) are wiped out, allowing you a fresh financial start. However, Chapter 7 may require the liquidation (sale) of certain assets to pay back creditors, which can include high-value items like real estate, jewelry, and possibly your car.

Whether or not you lose your car depends on two main factors:

• Equity in the Vehicle: Equity refers to the difference between the value of your car and the amount you owe on it. For example, if your car is worth $10,000 and you owe $5,000, you have $5,000 in equity.

• Exemptions: Every state offers exemptions that allow you to keep certain property, including your car, up to a specific value. If your car’s equity is below the exemption limit, it’s likely you can keep it.

Chapter 13 Bankruptcy: Reorganization

Chapter 13 bankruptcy is often referred to as a "reorganization bankruptcy" because it allows you to keep your property, including your car, while you repay a portion of your debt over a period of 3 to 5 years. In Chapter 13, you’ll create a repayment plan that consolidates your debts and makes monthly payments to a bankruptcy trustee. This option is often chosen by people who are behind on their car payments or mortgage but want to keep their property.

If you’re behind on car payments, Chapter 13 allows you to catch up on missed payments through the repayment plan. While the car is not sold in Chapter 13 bankruptcy, the loan must still be repaid, and you must make all required payments on time.

Can You Keep Your Car in Bankruptcy?

Now that you understand the differences between Chapter 7 and Chapter 13 bankruptcy, let’s explore how you can keep your car under each type of filing.

Chapter 7: How to Keep Your Car

In a Chapter 7 bankruptcy, the key to keeping your car is whether it falls under the bankruptcy exemptions in your state. Here's how it works:

1. Car Exemptions: Each state has specific exemption laws that protect certain property from being sold during bankruptcy. If your car’s equity (the value of the car minus what you owe) is below the exemption limit, you can keep it. For example, if your state’s exemption allows up to $5,000 in equity for a vehicle and your car is worth $6,000, but you only owe $3,000, your car would have $3,000 in equity, which is within the exemption limit. In this case, you could likely keep your car.

2. Reaffirmation Agreement: If you have a car loan, you might be able to negotiate a reaffirmation agreement with the lender. A reaffirmation agreement is a legal agreement in which you agree to continue making payments on your car loan, even though your debts are being discharged in bankruptcy. This allows you to keep the car as long as you continue making the agreed-upon payments. Be careful, though—if you sign a reaffirmation agreement and later default on your car loan, the lender can repossess the car.

3. Surrendering the Car: If your car has significant equity that exceeds the exemption limits, and you cannot afford to reaffirm the loan, the bankruptcy trustee may sell the car to pay creditors. However, this is often avoidable with proper planning and the use of exemptions.

Chapter 13: How to Keep Your Car

In Chapter 13 bankruptcy, keeping your car is generally not an issue, as long as you make the required payments through the repayment plan. Here’s how it works:

1. Catch Up on Car Payments: If you are behind on car payments, Chapter 13 allows you to "catch up" through the repayment plan. The payments you owe for your car loan can be included in the plan, and you will be given a set period (usually 3 to 5 years) to pay off the arrears. As long as you make your monthly payments on time, you can keep your car.

2. Modification of Loan Terms: In some cases, Chapter 13 may allow you to modify the terms of your car loan. If your car is worth less than the amount you owe (this is called "underwater" or "upside down" on the loan), the bankruptcy court may allow you to reduce the principal balance to the car’s current value, saving you money in the long term. This is more common with older vehicles or those with high depreciation.

3. Secured Debt Priority: Car loans are considered "secured debts" in Chapter 13 bankruptcy. As long as you make your payments under the reorganization plan, you can retain your car. However, missing payments can result in repossession, so it’s important to stay on top of your repayment obligations.

What Happens if You Don’t Keep Your Car?

If you don’t keep your car during bankruptcy, the outcome will depend on the type of bankruptcy you file.

• In Chapter 7, if you are unable to exempt your car and do not reaffirm the loan, the bankruptcy trustee may sell your car to pay creditors. This could leave you without a car, but it will also wipe out your car loan debt.

• In Chapter 13, if you fail to make payments on the car loan as part of the repayment plan, the lender may repossess the vehicle. This could happen if you’re behind on payments or do not complete the plan as agreed.

Tips for Keeping Your Car in Bankruptcy

1. Know Your State’s Exemption Laws: The most important step in protecting your car is understanding the exemption laws in your state. Some states have generous exemptions that allow you to protect the full value of your car, while others may have lower limits. Consider working with a bankruptcy attorney who can help you understand what you can protect.

2. Consider Reaffirming Your Car Loan: If you want to keep your car, signing a reaffirmation agreement may be a good option, but only if you can afford to continue making payments. Ensure that you understand the risks involved, especially if you’re filing for bankruptcy to get out of overwhelming debt.

3. Consult with a Bankruptcy Attorney: Navigating bankruptcy laws can be complex, especially when it comes to protecting assets like your car. Consulting with a bankruptcy attorney can provide clarity on your options and help you avoid mistakes that could cost you your vehicle.

4. Explore Chapter 13 If You’re Behind on Payments: If you are behind on car payments but still want to keep your car, Chapter 13 bankruptcy may be the best option. The ability to catch up on payments through a repayment plan can help you retain your car while addressing other debts.

Conclusion

Filing for bankruptcy doesn’t necessarily mean you have to lose your car. Whether you’re filing for Chapter 7 or Chapter 13, it’s possible to keep your vehicle if you carefully consider your options and take advantage of the right protections, such as exemptions or reaffirmation agreements. By understanding the process, working with a qualified attorney, and exploring all of your options, you can navigate bankruptcy while holding onto your car and working towards a fresh financial start.