Your ability to keep your car when filing for bankruptcy depends on several factors, including the type of bankruptcy you are filing, the status of your car payments and the equity status of your vehicle.
Below is some information that can help you determine if you will be able to keep your motor vehicle when seeking bankruptcy protection.
Chapter 7 bankruptcy
Most of your debts will be discharged when you file for Chapter 7 bankruptcy. However, in return for this benefit, you will have to give up some non-exempt property to your bankruptcy trustee, who sells that property to pay back creditors of unsecured debts. Your ability to keep your car in Chapter 7 depends on whether the equity you have built in your vehicle is exempt and whether you have fallen behind in payments.
Every state allows people filing for bankruptcy to keep certain types of property, up to a maximum dollar amount. This includes motor vehicle exemptions. The exempt amount varies depending on location, but if the equity you have in your vehicle (the market value minus the value of your loan) is significantly more than the vehicle exemption figure that applies in your case, your bankruptcy trustee could sell your car and give you the exempt portion. You could then use what’s left to pay back your creditors.
If you have fallen behind on vehicle loan payments, you will lose your car when filing for Chapter 7 bankruptcy regardless of your equity status unless you are able to negotiate a payment plan with your lender. Options in this case include:
Redeeming the vehicle: You could “redeem” your car by paying the lender what it would cost to replace it based on its current value. However, you are only allowed to do this if the vehicle is exempt or the trustee decided not to sell the vehicle.
Reaffirming the debt: You could negotiate a new payment plan with your lender, changing the terms of your original contract. If you default on this agreement, however, you will be liable for paying off the entire balance.
Chapter 13 bankruptcy
It’s often easier to keep your car when filing for Chapter 13 bankruptcy than it is when filing for Chapter 7. This is because Chapter 13 allows you to maintain your property while paying back some debts in full and others in part over the course of a repayment plan that typically lasts between three and five years. During this time, you must stay up to date with your vehicle loan payments. There are even ways you can reduce your car loan in some circumstances when filing for Chapter 13 bankruptcy, especially if your vehicle is worth less than the total amount of your loan.