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 bankruptcy exemptions are available to you

3. The type of bankruptcy you file

Exemptions specify what property you can keep during your bankruptcy case and up to what amount. Most states and the federal bankruptcy exemptions have a specific motor vehicle exemption. 

The exemption needs to cover your car’s fair market value if you own it outright or the amount of equity you have in the car if you’re still paying on a car loan. We dive more into all of this below.

How To Keep a Car You Own Free and Clear in Bankruptcy

If you own your car free and clear, the next question you have to answer is: “How much is my car worth?” The answer — the fair market value of the car — determines whether you risk losing the car in a bankruptcy. You’ll be able to keep it if your car’s current fair market value is less than the available exemption in your state.

To determine your car’s fair market value, you can look up your vehicle on a website like Kelley Blue Book. Then determine what exemptions are available to you. Upsolve has an article linking to the exemptions for every state. This article will tell you whether you get to choose between state and federal exemptions and what the motor vehicle exemption is in your state. 

You may also have access to a wildcard exemption. This is called a “wildcard” because it can be used to protect any property. If your car is worth more than the available motor vehicle exemption, you may be able to protect the rest with a wildcard exemption.

If you have a simple Chapter 7 case, you may be eligible to use Upsolve’s free filing tool. The filing tool walks you through the filing step by step.

What Are Bankruptcy Exemptions?

Exemptions are legal protections that allow you to keep certain property when you file for bankruptcy. Each state has its own set of exemptions, and there’s also a set of federal exemptions outlined in the Bankruptcy Code. These exemptions cover things like your car, home, and personal belongings. If your property’s value is within the exemption limit, the bankruptcy court can't take it to pay your creditors. This is how most people can keep essential items like their car and household goods while getting a fresh financial start through bankruptcy.

In the majority of Chapter 7 cases, federal or state exemptions protect all of the filer’s personal property.

What Happens if Your Car’s Value Is Over the Exemption Limit?

If your car’s value is over the exemption limit (including any available wildcard exemption), the Chapter 7 bankruptcy trustee can sell it and use the proceeds to pay your credit cards and other unsecured debts. But first, they have to give you your exemption amount. 

For example, let’s say you own a car worth $15,000, and you can exempt $6,000. The bankruptcy trustee sells the car for $15,000. In this case, you’d get $6,000 to purchase a different car, and the remaining $9,000 would be distributed to your unsecured creditors.

This is less common than you might imagine though. That’s because cars don’t keep their value very well, so people rarely have equity that’s above the available motor vehicle exemption. Chances are, if you’ve had your car long enough that you paid off the car note, its fair market value is below the exemption amount. 

If you do find yourself in this situation, you could also consider filing Chapter 13 bankruptcy, which allows you to pay for the unprotected equity amount as part of the required 3–5-year repayment plan. In some cases, this leaves people worse off, though. So it’s important to consider your options carefully. It can be helpful to schedule a free consultation with a bankruptcy lawyer to discuss the specifics of your case.

How To Keep a Car With a Car Loan During Bankruptcy

Bankruptcy helps eliminate unsecured debts like credit card debt and medical bills. Auto loans are secured debt. So you can’t get rid of your car loan in bankruptcy and keep your car. But most people who are up to date on their car loan and whose equity in the car loan is protected by an exemption are able to keep their vehicles. This often requires taking the additional step of reaffirming the loan or redeeming the vehicle. More on that later. 

First, to figure out how much equity you have, you take the current fair market value of your car and subtract what you still owe on the loan. As long as the equity is less than the exemption amount (and you claim it on your Schedule C), your bankruptcy trustee can’t touch your car. 

If you’re covered, you can decide whether you want to reaffirm the loan or redeem the vehicle. If you aren’t covered or aren’t confident that you’ll be able to continue making your monthly payments, you may want to consider voluntarily surrendering the vehicle.

How To Reaffirm a Car Loan in Chapter 7 Bankruptcy

Reaffirming a car loan in Chapter 7 bankruptcy allows you to keep your car by agreeing to continue making monthly payments, even after your other debts are wiped out. If you reaffirm, the car loan won’t be discharged, so you'll still be responsible for it. 

This can be a good option if you need the vehicle and can comfortably afford your car payments. But be careful — if you fall behind after reaffirming, the lender can still repossess the car and you’d owe any remaining balance. Make sure reaffirming makes sense for your budget before committing to it.

A note of caution: If you were facing repossession, a reaffirmation may not be the way to go. If the only reason the car lender hasn’t taken back the car yet is the automatic stay that took effect when your bankruptcy petition was filed, reaffirming the debt is a risk that may not be worth the reward. 

You can learn more by reading What Is a Reaffirmation Agreement and How Do You Use One?

How To Redeem Your Car in Bankruptcy

Redeeming your car in Chapter 7 bankruptcy allows you to keep it by paying its current market value in a lump sum, no matter how much you still owe on the loan. This is a good option if you owe more on your car than it’s worth, but you’ll need to come up with enough cash to make the lump-sum payment. Once you pay the agreed amount, the lender releases the lien, and you own the car free and clear. 

If paying a lump sum isn’t realistic for you, reaffirming or surrendering the car might be a better option.

Surrendering the Car: When It’s Best To Let It Go

Surrendering your car in Chapter 7 bankruptcy can be a smart choice if the payments are too high, you owe more than the car is worth, or it’s no longer affordable. When you surrender the car, you return it to the lender, and any remaining loan balance is wiped out as part of your bankruptcy discharge. 

This option allows you to walk away from the debt and free up money for other essential expenses, giving you a clean financial slate. If your car is more of a burden than a benefit, surrendering it may be the best way to move forward.

What Happens To Leased Cars During Bankruptcy?

Filing for Chapter 7 bankruptcy doesn’t automatically mean you’ll lose your leased car. Leased cars are treated differently than cars you own, and you have options for how to handle the lease during your bankruptcy. You can either choose to keep the lease and continue making payments or reject the lease and return the car. The option you choose depends on your financial situation and whether you still want or can afford the vehicle.

To learn more, check out Upsolve’s Guide to Car Leases in Bankruptcy.

Is Your Car Lease Affected by Bankruptcy?

Yes, your car lease is affected by bankruptcy, but you get to decide how to handle it. If you want to keep the car, you can assume the lease, meaning you’ll continue making the regular payments under the original lease terms. If you no longer want the car or the payments are too high, you can reject the lease and return the vehicle. 

If you reject the lease, any remaining payments or penalties will be discharged as part of your bankruptcy, meaning you won’t owe anything else. Just keep in mind that rejecting the lease will mean giving up the car and losing your access to the vehicle.

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.

If you aren’t sure what the best debt relief option for you is, you can take our quick screener to see what you’re eligible for.