Can I Keep My Car if I File Chapter 7 Bankruptcy?

Can You Keep Your Car in Chapter 7 Bankruptcy?

Many people are able to keep their car and file bankruptcy successfully.

Whether or not you can keep your car when you file depends on three main factors:

1. Whether your car is financed or you own it outright

2. What exemptions you use in your bankruptcy case

3. The type of bankruptcy you file

📌 Bankruptcy exemptions are legal rules that determine what property — and up to what dollar amount — you’re allowed to keep when you file. Most states and the federal exemption system include a motor vehicle exemption that protects some or all of your car’s value.

💸 As of 2025, the federal motor vehicle exemption is $5,025. This amount will increase again in 2028.

If you own your car outright, the exemption needs to cover the car’s fair market value to keep it. If you're still paying off a loan, the exemption needs to cover the equity you have in the car. We break this down below.

If you have a simple Chapter 7 case, you may be eligible to use Upsolve’s free filing tool. The tool walks you through the bankruptcy process step by step, including applying exemptions to your car and other property.

Key Concepts: Equity & Exemptions Explained

Before we cover how to keep your car, it’s helpful to understand two key ideas that apply in most situations: equity and exemptions.

What Is Equity?

💰 Your vehicle equity is how much of your car’s value you actually own.

To figure out your equity, subtract the amount you still owe on your car loan from the current fair market value of the car. If you own your car outright, your equity is just the car’s full value.

💡 Fair market value is what your car would sell for today, based on its condition, mileage, and other factors — not what you originally paid for it. You can look up the value of the vehicle on websites like Kelley Blue Book or Edmunds.

What Are Bankruptcy Exemptions?

🛡️ Exemptions are legal protections that let you keep certain property, like your car, during bankruptcy. You claim exemptions in Schedule C, which is an official form in your bankruptcy petition.

Each state (and the federal government) has its own list of exemptions with dollar limits. Most states include a motor vehicle exemption that covers some or all of your car’s value. 

You might also be able to use a wildcard exemption to protect extra value in your car (or something else). A wildcard exemption is a flexible exemption you can use to cover any type of property.

💡 If your equity is less than or equal to the exemption amount, you can likely keep your car.

How To Keep a Paid-Off Car in Chapter 7 Bankruptcy

If you own your car outright, there’s a good chance you’ll be able to keep it when you file for Chapter 7 bankruptcy.

🔑 The key is whether your car’s value is protected by the motor vehicle exemption you use. Here are the three steps to figuring out if you can keep your paid-off car during Chapter 7.

Step 1: Find Your Car’s Fair Market Value

Your car’s fair market value is what it would sell for today, based on its condition, mileage, and location. It’s not what you originally paid or what you think it should be worth.

💡 You can get a fair estimate by entering your car’s details on sites like Kelley Blue Book or Edmunds.

Step 2: Compare That Value to Your Available Exemption

The motor vehicle exemption is a legal protection that lets you keep up to a certain amount of value in your car. Most states offer this, and the federal exemption currently allows you to protect up to $5,025 for a vehicle.

🛠️ If your car’s value is less than or equal to your exemption amount, you can keep it.

For example, if your car is worth $3,800 and you’re using the $5,025 federal motor vehicle exemption, your car will be fully protected.

Step 3: Use a Wildcard Exemption if Needed

If your car’s value is slightly more than your motor vehicle exemption, you might still be able to protect it using a wildcard exemption. This is a flexible exemption that can be used to protect any type of property, including the extra value in your car.

🚗 For example, let’s say your car is worth $6,500. If your motor vehicle exemption covers $5,000 and you have at least $1,500 available under your wildcard exemption, you can still protect the full value of the car.

What Happens If Your Car Isn’t Fully Protected?

If your car’s value is more than your available exemptions, the bankruptcy trustee might decide to sell it. If that happens, you’ll receive the exemption amount in cash. Then, the rest of the proceeds go toward paying your creditors

But this isn’t common for paid-off cars — especially if the car is older and has lost value over time.

How To Keep a Car With a Loan in Chapter 7 Bankruptcy

If you're still making payments on your car, that means you have a secured loan.

💡 A secured loan is a loan that’s tied to property. In this case, your car.

In Chapter 7 bankruptcy, you can get rid of many unsecured debts (like credit cards and medical bills), but you can’t keep your car or other secured debt and erase the loan at the same time.

That said, many people who are current on their car loan payments and whose equity is protected by a bankruptcy exemption are able to keep their car. 

We’ll walk through how to determine whether your car is protected and then explain your options in more detail. You start by calculating the equity.

Step 1: Calculate Your Equity

First, you’ll need to figure out how much equity you have in the car. Here’s how:

• Look up your car’s fair market value — what it would sell for today based on its condition, mileage, and age.

• Subtract the remaining loan balance.

• This gives you the equity — the portion of the car’s value you actually own.

For example, if your car is worth $10,000 and you still owe $7,000, your equity is $3,000.

Step 2: Check Your Exemptions

Once you know your equity, see if it’s protected by a bankruptcy exemption. Most states (and the federal set of exemptions) have a motor vehicle exemption that lets you keep a certain amount of value in a car. 

If your equity is less than or equal to the exemption and you claim it correctly in your forms (specifically on Schedule C), the bankruptcy trustee can’t take your car.

If your equity is fully protected, you can move on to choosing how you want to handle the loan.

If it’s not protected, the trustee could sell the car to repay creditors. This isn’t very common in Chapter 7 bankruptcy, especially if your car is newer or you still owe a lot on the loan.

Step 3: Choose What To Do Next

Once you know your equity is covered, you’ll usually need to make a choice about what to do next. You can:

• Reaffirm the loan, which means you agree to keep the car and continue making payments

• Redeem the car, which means you pay the lender the car’s current value in a lump sum and then own the car outright

• Surrender the car, which means you give the car back to the lender because it’s no longer affordable or worth keeping

Let’s take a look at each of these options in depth. 

Reaffirm the Loan

Reaffirming the loan means you sign an agreement saying you’ll keep the car and continue making monthly payments — just like you were before filing for bankruptcy.

This can be a good choice if:

• You’re current on payments.

• You need the car for work or family.

• You’re confident you can afford the payments going forward.

✍️ Some lenders require filers to sign a reaffirmation agreement.

Keep in mind: If you reaffirm the loan then fall behind on payments after your bankruptcy, the lender can repossess the car. This is a double whammy because you’ll lose the car and you may still have to pay the lender a deficiency balance. 

💡 If you choose to reaffirm the loan, make sure this fits your long-term budget .

If you were already behind on payments when you filed, reaffirming may be risky. In some cases, the only thing stopping repossession is the temporary pause created by your bankruptcy filing (called the automatic stay).

Redeem the Car

Redeeming the car means you pay its current fair market value in a single lump sum — regardless of how much you still owe on the loan. Once you pay that amount, the lender releases the lien and the car is yours, free and clear.

This option can make sense if:

• You owe more than the car is worth.

• You have (or can borrow) enough money to pay the lump sum.

If a lump-sum payment isn’t realistic, reaffirming or surrendering may be better options.

Surrender the Car

Surrendering the car means you give it back to the lender — and the rest of the loan is wiped out in your bankruptcy discharge.

This can be a smart move if:

• The car payments are too high.

• The car isn’t worth what you owe.

• You’re ready to walk away from the debt and start fresh.

Surrendering lets you move on without a car loan weighing you down, especially if the vehicle no longer fits your needs or budget.

What Happens to a Leased Car in Chapter 7 Bankruptcy?

Leased vehicles are treated differently from cars you own or are financing. Filing for Chapter 7 bankruptcy doesn’t automatically mean you’ll lose your leased car. 

During your bankruptcy, you can either:

✅ Assume the lease by keeping the car and responsibly making the lease payments, just as you were before filing. This option may make sense if the car is reliable, affordable, and fits your lifestyle.

❌ Reject the lease and return the car to the leasing company. If you do this, any remaining payments, fees, or penalties will be wiped out as part of your bankruptcy discharge. This option can be a good way to get out of an expensive or unaffordable lease.

The right choice depends on your financial situation and whether the car still works for your budget and needs. If you aren’t sure what to do, you can get some legal advice on your case from a bankruptcy attorney. Most offer free consultations.

Want a deeper dive? Check out Upsolve’s Guide to Car Leases in Bankruptcy.

What Happens to Your Car in Chapter 13 Bankruptcy?

If you’re behind on car payments, Chapter 13 can give you time to catch up through a 3–5-year repayment plan. 

💡 This type of bankruptcy often offers more flexibility than Chapter 7 when it comes to keeping your car. But it also comes with more complexity and a longer commitment.

If you want to keep your car, you’ll typically include your auto loan in your Chapter 13 repayment plan. That means you’ll make one monthly payment to the bankruptcy trustee, who then pays your creditors, including your car lender.

A Chapter 13 plan can help you:

• Avoid car repossession

• Catch up on missed payments

• Potentially reduce your interest rate or, in some cases, lower your loan balance through a process called a cramdown (if the car is worth less than what you owe and certain requirements are met)

🤝 If you’re considering Chapter 13, it’s a good idea to set up a free consultation with a bankruptcy lawyer near you. They can help you understand your options, how the payment plan works, and how Chapter 13 bankruptcy proceedings typically go.

Let’s Summarize…

If you own your car free and clear, you will be allowed to keep it as long as its current value is less than your available exemption amount. If you’re still making payments on the car, you can choose to keep the car by reaffirming or redeeming it, or you can surrender it back to the car lender. If you surrender the car, the remaining balance on your car loan is usually wiped out in bankruptcy along with your other unsecured debts. 

If you decide to file Chapter 7, check to see if you’re eligible to use Upsolve’s free filing tool. It only takes a few minutes to see if you’re eligible, and it can save you thousands of dollars in attorney fees. If you aren’t eligible to use the tool or you prefer to work directly with an attorney, Upsolve can help you set up a free consultation with an experienced lawyer near you.