Can I Sell My Car During Bankruptcy?

Can You Sell Your Car During Bankruptcy?

Selling your car while you're in bankruptcy is possible, but it depends on the type of bankruptcy you filed and how much equity you have in the car.

Equity is the value of your car minus what you still owe on it. For example, if your car is worth $10,000 and you owe $3,000, the equity is $7,000.

Bankruptcy laws let you protect a certain amount of property through exemptions. These vary by state and can protect part, or sometimes all, of your car’s equity.

If your car has more equity than you can protect, the trustee may be able to sell it to pay your creditors, or require you to pay that extra value into your bankruptcy case.

No matter which type of bankruptcy you file, you’ll likely need the trustee’s permission before you sell your car. Sometimes, court approval is also required. The steps and outcomes vary depending on whether you're in a Chapter 7 or Chapter 13 case.

Should You Wait Until After Your Chapter 7 Case Ends To Sell Your Car?

If you're thinking about selling your car during Chapter 7 bankruptcy, you might wonder if it's easier to wait until your case is over. In many situations, waiting can help avoid complications.

When you file Chapter 7, everything you own becomes part of what's called the bankruptcy estate. That includes your car. But if your car is fully protected by an exemption and the trustee decides not to take any action with it, you're usually free to sell it after your case is closed.

Once the case is officially closed — and the trustee hasn’t taken steps to sell the car — you typically won’t need anyone’s permission to sell it. The car is no longer part of the bankruptcy process, so you can handle it like you normally would.

That’s why some people choose to wait until their case is done before selling their car. It can help you avoid extra paperwork or delays.

Selling a Car During Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, the trustee looks at whether your car has any nonexempt equity that could be used to pay your creditors. If the equity in your car is fully covered by an exemption, you’re usually allowed to keep the car and sell it on your own, with permission. But if there’s nonexempt equity — meaning more value than what’s protected by exemptions — the trustee may decide to sell the car.

Here’s how that might work:

• The trustee sells the car.

• They use the sale proceeds to pay off your car loan (if you still owe money).

• You receive the exempt amount you're allowed to keep.

• Any remaining money goes to your bankruptcy case to help pay unsecured debts like credit cards or medical bills.

Some Chapter 7 trustees may allow you to buy back the nonexempt equity in your car through a payment plan. Others may require a lump-sum payment instead. Each trustee handles these situations differently, so it’s helpful to ask how your local trustee typically handles car sales.

If you already have a buyer lined up for your car, the trustee will likely need to approve the sale and receive the money first. Once the car is sold, you may receive your exempt amount, and the rest goes toward your creditors.

Selling a Car During a Chapter 13 Bankruptcy

Selling your car during a Chapter 13 bankruptcy works differently. That’s because Chapter 13 involves a 3–5 year repayment plan, and you're generally allowed to keep more of your property.

If you want to sell your car in Chapter 13, you’ll need to:

• Get permission from your trustee.

• Possibly get court approval.

• Show how the sale will affect your budget and payment plan.

If your car has a loan, the trustee may require that the loan gets paid off with the sale proceeds. You may also need to pay any nonexempt value to the bankruptcy estate, just like in Chapter 7. But in Chapter 13, there's a bigger focus on how the sale impacts your monthly plan payment.

For example:

• If your monthly car payment was $200 and you sell the car without replacing it, the trustee may increase your plan payment by $200.

• If you buy a cheaper car with a $150 monthly payment, the trustee might ask for the $50 difference to go into your plan.

• If you try to buy a more expensive car, the trustee may object if the higher payment means less money for creditors.

If you're not planning to buy another car, the trustee may ask for all proceeds above your exemption amount to be paid into your repayment plan.

As you can see, this can get complicated. If you're considering Chapter 13, it's usually best to speak with a local bankruptcy attorney before filing. Most offer free consultations.

Tip: Talk to the Trustee Before Selling Your Car

If you're thinking about selling your car during bankruptcy, it's a good idea to reach out to the trustee's office first. The trustee can let you know whether they’d object to the sale and what steps you need to follow. In some cases, the trustee may need to be involved in the sale—especially if the car has nonexempt value or will be sold through an auction.

If you already have a buyer lined up, the trustee will likely require you to turn over the sale proceeds. You’ll usually receive the portion of the money that’s protected by exemptions, and the rest will go toward your bankruptcy case to help repay your creditors.

Even though you’ll be working closely with the trustee’s office during this process, it’s important to remember that the trustee isn’t your lawyer and can’t give you legal advice.