Can You Keep Your Car After Filing for Chapter 7 Bankruptcy?

Deciding to file for bankruptcy is difficult, even when it’s our best option to get out of debt. Many people worry that they won’t be able to keep their house or car if they file for Chapter 7 or Chapter 13 bankruptcy.

The good news is that regardless of the type of bankruptcy you file, there is a good chance the bankruptcy court will allow you to keep your motor vehicle. As long as the motor vehicle exemption covers the equity in your car and you stay up to date with your monthly payments, you should be able to either reaffirm or redeem your auto loan.

In this article, we’ll briefly explain the Chapter 7 bankruptcy process and how it impacts your car loan. We will also discuss important factors to consider when deciding whether to reaffirm your car loan.

If you’ve already filed for Chapter 7 bankruptcy or are considering it, contact a local bankruptcy attorney for help. They can walk you through your options and help you decide the best path forward.

Factors That Determine Whether You Can Keep Your Car After Bankruptcy

Whether you can keep your car after filing Chapter 7 bankruptcy depends on several factors. If there is no equity in the vehicle, the lender may allow you to reaffirm the loan. This means that you continue to make payments on the loan and, as long as you stay current, you can keep your car or SUV.

Generally, certain factors affect whether you can keep your car after a Chapter 7 bankruptcy filing. Some of these factors include:

• Your state bankruptcy laws
• The amount of equity in your car
• The amount left on your loan
• Whether the finance company will agree to your keeping the car
• How far you are in arrears

An experienced Chapter 7 bankruptcy lawyer can assess your unique case and explain your options regarding keeping your motor vehicle. They will discuss whether you can claim any exemptions. They will also explain other options, such as reaffirming the loan.

You Must Meet Certain Requirements to Keep Your Car

You do not have a guaranteed right to keep your vehicle when you file bankruptcy. In fact, if this is your primary asset, whether you can keep it may be a determining factor in deciding whether to file for bankruptcy.

You can often keep your vehicle after your Chapter 7 bankruptcy case if you meet the following criteria:

• Your equity is exempt, and you reaffirm or redeem the loan
• You stay current on your car payments

If you become delinquent on your car loan, the creditor may repossess your vehicle and sell it to help pay off your balance.

Can You Take Advantage of the Motor Vehicle Exemption?

One way you can protect your car in bankruptcy is by applying a state or federal bankruptcy exemption. Regardless of which chapter you file under, certain exemptions are available to you. The way bankruptcy exemptions work is quite simple.

Your state’s bankruptcy laws (or federal law) provide you with a specific dollar amount you can apply toward your car’s equity. Your equity is the difference between the fair market value of the car and the loan balance.

You can apply the motor vehicle exemption toward the equity in your car or SUV. For example, let’s say you live in New York, where the motor vehicle exemption is $4,550. And your car has $4,000 equity in it. Since the amount of equity is less than the exemption amount, you can protect your vehicle and keep it after bankruptcy.

Now, let’s say you have $7,000 in vehicle equity. Since the exemption is only $4,550, which leaves $2,450 in equity. There is a chance that the bankruptcy trustee will sell your car and use the $2,450 to pay off your other debts.

This process is called “liquidation,” and your trustee has the legal right to sell any non-exempt assets to pay your debts.

Note: In some states, you can opt to apply the federal exemption, which, for motor vehicles, is $5,025. If your state’s exemption limits are very low or your state doesn’t offer a motor vehicle exemption, it may make more sense to claim the federal exemptions.

You May Be Able to Claim the Wildcard Exemption

A wildcard exemption is what the name suggests. It allows you to exempt any asset up to a certain amount. Some states do not allow debtors to apply a wildcard exemption to nonexempt property. For example, you are not allowed to apply the wildcard exemption (or personal property exemption) to non-exempt assets in states such as Florida, Louisiana, or North Carolina.

If you live in a state that allows you to apply the wildcard exemption amount to the property of your choice, you can apply it toward your car loan. 

Another option is to combine the wildcard exemption with your state’s motor vehicle exemption. If, between the two, you can protect the total equity in your car, you should be able to keep it.

Using Other Exemptions to Keep Your Car

In addition to the wildcard exemption, some states allow you to carry over a balance from other bankruptcy exemptions and apply it to your vehicle. For example, in some states, if you don’t use your full homestead exemption, you can apply the remaining amount to your car.

Some states limit the application of the wildcard exemption to personal property. Your bankruptcy attorney will be familiar with your state’s laws and can help you determine whether you can keep your vehicle.

Will the Bankruptcy Trustee Sell Your Car?

If the equity in your car exceeds your state’s exemption amount, the bankruptcy trustee may sell your vehicle to help pay your debts. The trustee will pay you the exempt amount from the proceeds, then use the remaining funds to pay creditors.

If the trustee sells your vehicle, you’ll have to decide what to do about buying a vehicle post-bankruptcy. Your options may include:

• Wait to buy a car in the future
• Purchase a lower-priced car
• Take out a loan for a lower-priced car

Trying to finance a new or used car after a bankruptcy discharge often means paying a much higher interest rate. Once the lender sees the bankruptcy on your credit report, they will require either a sizeable down payment or an inflated interest rate. You can refinance your vehicle in a year or two after you’ve made consecutive on-time payments and begun to rebuild your credit rating.

The Automatic Stay Protects Your Car During Bankruptcy Proceedings

One benefit of filing bankruptcy is that creditors must stop all collection activity once you file your bankruptcy petition. This is because filing your case triggers something called the “automatic stay.” The automatic stay prevents your creditors from demanding payment on your accounts.

The automatic stay also prevents your creditors from engaging in the following:

• Foreclosure
• Repossession
• Wage garnishment
• Bank account levies
• Collection calls
• Civil lawsuits

The debt relief the automatic stay provides is immense. If any of your creditors continue to hassle you after you file your bankruptcy, make sure you let your bankruptcy attorney know.

Other Options: Reaffirming or Redeeming Your Auto Loan

If you cannot protect your car using a bankruptcy exemption in your Chapter 7 case, there are other options available to you. This is something you should discuss with your bankruptcy lawyer during your first meeting.

1. You could reaffirm the debt. Reaffirming your auto loan just means that you sign a reaffirmation agreement promising to continue your monthly payments until the balance is paid in full. As long as you stay current on your payment plan, you should be able to keep your financed vehicle without issue.
2. You could redeem your motor vehicle. You do this by paying your auto lender the current value of your vehicle in a lump sum. The benefit of this is that you end up paying less than the full balance on your loan. However, redemption is only an option if you can come up with the money to pay the fair market value of your car. This may be possible if you receive a large tax refund prior to filing for bankruptcy. Or you may be able to borrow the money from family and friends.
3. A few states offer something called a “ride-through.” Essentially, this is similar to reaffirming the debt. However, you don’t sign a new agreement. Instead, you continue making payments on your auto loan as you did before filing bankruptcy.

One of the drawbacks to a ride-through is that, if you default on your payments, the lender can repossess the vehicle. The good news is that, if this happens, you won’t be personally liable for the remaining balance.

As stated above, only a few states, such as California and New Jersey, still allow this option. Furthermore, even in these states, the lender is not required to agree to a ride-through. If the bank wants to protect its interest in the balance owed on the loan (not just the vehicle itself), it will not approve a ride-through arrangement.

Feeling Stuck? Talk to an Attorney About Your Bankruptcy Filing

If you’re considering bankruptcy, contact a local bankruptcy lawyer to discuss your case and explore your options for keeping your motor vehicle. You’ll want to hire an attorney with many years of experience. This way, you know they are familiar with the bankruptcy laws and the bankruptcy process.

A seasoned bankruptcy lawyer understands the Bankruptcy Code and will help you protect your non-exempt and exempt property. Code and will help you protect your non-exempt and exempt property.