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Can I Keep My Car If I File Chapter 7 Bankruptcy in 2020?

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In a Nutshell

Most people can keep their car and get debt relief by filing bankruptcy. Of course, if you need a fresh start but you need your car just as much, you probably wonder about how this works in Chapter 7 bankruptcy. Keep reading to learn what a bankruptcy filing means for your car.

Written by Attorney Andrea Wimmer.  
Updated September 25, 2020


Person in car

Most people can keep their car and get debt relief by filing bankruptcy. Of course, if you need a fresh start but you need your car just as much, you probably wonder about how this works in Chapter 7 bankruptcy. Keep reading to learn what a bankruptcy filing means for your car.

Is the car yours? Or are you still paying the bank for it? 

Either way, it’s your property, called an asset, and is listed on Schedule A/B of your bankruptcy forms. The only exception to this general rule is if you’re leasing the vehicle. 

Leasing the car?

One way to tell if you’re leasing your vehicle are mileage restrictions. If you’re supposed to drive less than a certain number of miles every year, you’re likely leasing your vehicle. Since a car lease is a bit of a different story, there is an entire Guide to Leases in Bankruptcy in our Learn Center that explains it all. Check it out! 

If it’s not a lease, but you’re still making monthly payments, your car serves as “collateral” for the bank that loaned you the money to buy it. A collateral provides the car lender with security while you pay off the loan balance. That’s why this type of debt is called “secured debt.” It’s also what allows a repossession to take place if there is a payment default.  

If you’re not making car payments to anyone, you own the car free and clear. 

Keeping a car you own free and clear 

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 car’s fair market value - determines whether you risk losing the car in a bankruptcy. 

How much is your car worth? 

If you sold your car today, as is, what’s the most someone would pay you for it? That’s the value that matters. It doesn’t matter how much the car cost when you bought it… that’s old news. If you’ve had your car for a few years, it’s no longer in the same condition as when you bought it. How much it cost then doesn’t tell you how much it’s worth today.

It also doesn’t matter how much you ended up paying for it by the time the car loan was finally paid off. That amount includes the interest you paid and depending on the interest rate on your auto loan, that can be quite a bit more than the car was ever worth. 

Find out how much you can protect with an exemption

Filing a bankruptcy case is meant to give you a fresh start. Bankruptcy exemptions exist to make sure everyone filing a bankruptcy case can keep their most basic possessions. Depending on the state you’re filing in, and how long you’ve been there, you may be able to choose between the federal bankruptcy exemptions and the exemptions granted by your state law. 

The federal bankruptcy exemptions are listed in the federal bankruptcy law, called the Bankruptcy Code. The Bankruptcy Code allows every filer to protect one car with a value of up to $4,000. If a married couple files a joint bankruptcy case, they can protect two cars worth $4,000 each. 

If you’re not able to use the federal bankruptcy exemptions, make sure you check your state bankruptcy laws. Available exemption amounts differ from state to state. If you think your car is worth more than the available exemption amount, consider speaking with a bankruptcy lawyer in your state about it. 

Getting additional protection by claiming a wildcard exemption

The Bankruptcy Code and some (but not all) states also allow filers to take advantage of a wildcard exemption. They’re called a “wildcard” because they can be used to protect any property. If your car is worth more than the available motor vehicle exemption, see if you can protect the rest with a wildcard exemption in your state.

What if my car’s fair market value is greater than the exemption amount? 

If a vehicle you own free and clear has a fair market value that is much higher than the available exemptions, the Chapter 7 bankruptcy trustee can sell the car and use some of the sales proceeds to pay your credit cards and other unsecured debts. But first, they have to give you your exemption amount. 

Example:  Your car is worth 15,000 and you can exempt $6,000. The bankruptcy trustee sells the car for $15,000. You get $6,000 to purchase a different car. The rest is distributed to your unsecured creditors by the bankruptcy trustee. 

So how is it possible that most people get to keep their car? 

Since cars don’t keep their value very well, it’s not common to have a significant amount of equity over and 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 well below the exemption amount. 

Chapter 13 bankruptcy can help, too! 

If you have an expensive car you wish to keep, but you need debt relief, speak to a bankruptcy attorney about Chapter 13 bankruptcy. A bankruptcy filing under Chapter 13 of the Bankruptcy Code allows you to pay for the amount of equity not protected by an exemption over a 3 - 5 year long repayment plan. 

Keeping a car that’s not paid off

First, if you’re close to having it paid off, there is a good chance you have at least a little bit of equity in the car. In this context, equity is calculated by subtracting the current loan balance from the car’s value. 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. 

About your car loan

Chapter 7 bankruptcy is not a way to get a free car. If you’re still making payments on a car loan, you haven’t paid for your car yet and he only way to keep the car is to pay for it. 

Redeem the car by paying only how much it’s actually worth

One way to do this is through a redemption, where you pay for the car's current value in a single payment, no matter how much you owe. If that sounds like an option for you, here's where you can learn more about how to redeem your car.

Is paying a lump sum to redeem your car not possible? You have other options! 

If you're like most, you probably don't have access to that kind of money right after your bankruptcy filing. That is where reaffirmation agreements come in.

Reaffirmation Agreement Basics

A reaffirmation agreement allows a bankruptcy filer to keep their car by preventing the car loan from being discharged. They exist, in large part, to protect banks and credit unions after a Chapter 7 bankruptcy.  Here are some details about the process of reaffirming a car loan

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. 

Keep the car, keep the debt. 

Once the reaffirmation agreement is approved by the bankruptcy court, the reaffirmed debt is excluded from your discharge and you have to pay it off no matter what. If you don’t pay the loan off, the car lender can repossess the car and even start a wage garnishment to collect the loan balance. 

This is especially risky because you can only file Chapter 7 bankruptcy every 8 years, so there is no easy relief available if anything goes wrong.

Truly starting with a clean slate

Even if you weren’t facing repossession before filing, if your monthly income is not enough to comfortably make the payment on your car loan every month, it may be in your best interest to surrender the car and start with a clean slate. 

If you give the car back as part of your bankruptcy filing, you’re relieved from paying the loan. The discharge protects you even if the car sells for less than what you owe. 

Summary

If you own your car free and clear, you will be allowed to keep it as long as it’s current value is less than the available exemption amount. If you’re still making payments on the car, you can choose to keep the car, or surrender it back to the car lender. If you surrender the car, your obligation to pay the car loan is discharged along with your unsecured debts. 

If you are considering filing for Chapter 7 bankruptcy, but can’t afford a lawyer, Upsolve’s free web app may be able to help. Learn more in our 10-Step Guide to filing Bankruptcy for Free and if you like what you see, take this short quiz to find out if you’re a good fit! 



Written By:

Attorney Andrea Wimmer

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Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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