Can I File Bankruptcy and Keep My Car?
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Yes, you can file bankruptcy and keep your car. Whether or not you can keep it usually depends on your car's equity, the bankruptcy exemptions you can use to protect it, and how you address any outstanding loan on the vehicle.
There are two separate issues: whether a bankruptcy trustee can sell your car to pay creditors, and whether your lender can repossess it. Bankruptcy exemptions protect your equity from the trustee, but they don't prevent your lender from repossessing the car if you're behind on payments.
In my many years of practice, some of the ways I have seen people put their cars at risk in bankruptcy are by using an inaccurate vehicle value, not using the correct exemptions, or filing the wrong chapter of bankruptcy. I have also seen people file bankruptcy too early after buying a vehicle - before their lender has had the opportunity to properly secure their interest in the vehicle.
Quick Summary: Keeping Your Car in Bankruptcy
| Your situation | What it means for keeping your car | What to check next |
|---|---|---|
| Your car is paid off | Without other liens, the car's value is its equity. In Chapter 7, an allowed exemption covering that value generally protects the car from a trustee sale. | Confirm the vehicle's value and your available exemptions. |
| You are current on your car loan | Keeping the car may be possible, but current payments alone do not guarantee it. You still need to address your equity and the requirements for keeping a financed vehicle. | Review the Chapter 7 options, including the continuing liability that comes with reaffirmation. |
| You are behind on car payments | Chapter 13 may give you time to address missed payments through an affordable, court-approved plan. Chapter 7 does not provide a comparable repayment plan. | Compare Chapter 7 and Chapter 13 before choosing how to file. |
| You owe more than the car is worth | Chapter 7 redemption may let you pay the allowed secured claim in a lump sum. An eligible Chapter 13 loan may qualify for a cramdown that reduces its secured portion. | Check the requirements for redemption or cramdown, including the loan's age, type, and vehicle use. |
| Your equity exceeds your exemptions | A Chapter 7 trustee may sell the car if doing so benefits the estate. Chapter 13 may allow you to keep it, but unprotected equity can increase what your plan must pay creditors. | Review the risk of a trustee sale and Chapter 13 payment requirements. |
| You recently moved between states | Your current state's exemptions may not apply. Your domicile history determines which state's law governs your exemption options. | Check the 730-day rule and earlier lookback period before relying on an exemption amount. |
| You recently bought or refinanced the car | A trustee may be able to avoid an unperfected lender's lien and sell the car, even when your original equity appeared protected. | Review title records and lien-perfection dates before choosing a filing date. |
| Repossession is threatened or has already happened | The automatic stay generally pauses repossession while it applies. Filing does not guarantee the immediate return of a car already taken. | Check the stage of repossession, any scheduled sale date, and whether additional court action is needed. |
| You lease the car | Keeping it generally involves assuming the lease and meeting its continuing obligations. Overdue payments and the cost of continuing the lease need review. | Review lease-assumption requirements for the chapter you plan to file. |
An exemption protects equity from the bankruptcy trustee; it does not, by itself, resolve your lender's or leasing company's rights. The sections linked above explain the requirements and exceptions for each situation.
How Much Equity Do You Have in Your Car?
Your car's equity is its value after subtracting loans secured by it. Here's a simple formula:
Vehicle value − loan payoff amount = vehicle equity
Example: Calculating Your Car's Equity
Assume you have a car that is worth $18,000 and the loan payoff is $12,000. In this situation you would have $6,000 in equity. This example assumes that you own the car alone and that the lender has a valid, properly perfected lien.
How Do You Find the Right Value for Your Car?
Federal law defines value as the car's fair market value when you file bankruptcy. This means the price an informed buyer and seller would agree on in an ordinary sale. See 11 U.S.C. § 522(a)(2).
To support an estimate of your vehicle's value:
- Identify the exact vehicle. Use the correct year, make, model, trim level, and mileage.
- Document its actual condition. Keep photographs, repair estimates and document significant damage or mechanical problems.
- Save the supporting information. Keep a dated valuation report and relevant listings for comparable vehicles. When checking value, make sure you differentiate between trade-in, private-party, and retail values.
Car valuation is important. Federal law uses replacement value when valuing a car lender's secured claim in an individual Chapter 7 or Chapter 13 case. For a personal-use vehicle, this is the retail price a dealer would charge for a comparable car, considering its age and condition. See 11 U.S.C. § 506(a)(2).
"If there are two different valuations that impact whether your equity is protected, it's best to resolve that difference before you file your case. This is a situation where a closer review and maybe even an independent appraisal can be worth the time and effort," said Ben Wright, a veteran bankruptcy attorney and contributor here at USBankruptcyHelp.com.
When you have a well documented vehicle value and an accurate loan balance, you can evaluate how much equity your available bankruptcy exemptions will protect.
Which Bankruptcy Exemptions Can You Use?
Bankruptcy exemptions can protect your vehicle's equity. Some states do not allow you to choose between federal and state exemptions. Other jurisdictions give you a choice between state exemptions and the federal bankruptcy exemptions. Some states have generous vehicle exemptions and some states don't. Some states have wildcard exemptions that allow you to cover equity their vehicle exemption doesn't cover. Whatever the case may be, it's important to identify which exemptions you can use.
Recently Moved? Your Current State's Exemptions May Not Apply
Federal law looks at your domicile, meaning your permanent home, to determine what state's exemption laws you are eligible to use.
- If the same state has been your permanent home for all 730 days immediately before you file: You generally use that state's exemption laws. So if the state allows you to choose the federal bankruptcy exemptions or the state exemptions you can make the choice the state allows.
- If you changed your permanent home to another state during those 730 days: Count backward 730 days from your planned filing date. From that point, look back another 180 days. Identify the state that was your permanent home for the longest part of that earlier 180-day period. That state's law generally determines your exemption options, subject to its eligibility rules. You are looking at where your permanent home was roughly two to two and a half years before filing.
If the domicile requirement leaves you ineligible for any exemption, federal law allows you to choose the federal bankruptcy exemptions under section 522(d). This is referred to as the "federal fallback." You can find this protection in the final sentence of 11 U.S.C. § 522(b)(3).
Example: Assume you moved from State A to State B one year ago after living in State A for 5 years. The lookback period would probably point to State A's exemption laws.
"If you've recently moved, you should begin your exemption review with a timeline of where you made your permanent home. Choosing exemptions from the wrong state could undermine an otherwise careful calculation of whether your car is protected," said Wright.
If you recently moved between states, our free Bankruptcy Exemption Law Finder walks you through your expected filing date and domicile history to help identify which exemption laws may apply in your situation. Use it as a starting point before comparing vehicle exemption amounts. No email or contact information is required.
How Much of Your Car's Equity Is Protected?
Let's go back to the previous example. Your $18,000 car has a $12,000 loan payoff, leaving $6,000 in equity. The table below shows how two hypothetical exemption limits would affect that equity.
| Available exemption | Protected equity | Unprotected equity |
|---|---|---|
| $6,000 | $6,000 | $0 |
| $4,000 | $4,000 | $2,000 |
Some jurisdictions also provide a wildcard exemption that can be used to protect different types of property. A wildcard exemption may cover additional car equity, subject to your jurisdiction's rules.
If you find that you have unprotected equity, it might be a good idea to explore how that would be treated in each chapter of bankruptcy. We will discuss this more in the Chapter 7 and Chapter 13 sections below and how they can affect keeping your car.
Help Finding Your State's Vehicle Exemption
Our bankruptcy exemption reference guide can help you review the available protections. Check the limits effective on your filing date and confirm that you qualify to use them.
You can also use our Vehicle Exemption Estimator tool below to help you get an idea of the vehicle exemption you may be able to use in your state. Simply input your information in the form and push "next" when prompted. This tool asks you relevant questions needed to estimate what exemption you could use, and if your vehicle may or may not be within your jurisdiction's exemption limits. This free tool doesn't require you to enter any contact info like your email, address or phone number. Use the Vehicle Exemption Estimator as a starting point. It does not replace qualified legal advice.
Keeping Your Car in Chapter 7
In Chapter 7 bankruptcy, a Chapter 7 trustee reviews each case to see if there is any non-exempt property that can be sold to pay creditors. So if your car's equity isn't protected by an exemption in your jurisdiction, it could potentially be sold to pay creditors.
If Some of Your Equity Is Not Protected
If some or all of your equity isn't protected by the exemption you are able to use, the trustee considers how much money would remain for creditors after a sale, taking into consideration liens, your allowed exemption, and the cost of selling the vehicle. Whether your car is paid off or financed, unprotected equity can create a risk of a trustee sale.
If after taking all of this into account the trustee determines that there would be very little left over to pay creditors, the trustee may abandon property on the grounds that it offers inconsequential value and benefit to the bankruptcy estate. In this context, abandonment means releasing the estate's interest in the property. See 11 U.S.C. § 554.
On the other hand, if the trustee determines that there would be significant funds available after the car is sold, the trustee would be more likely to actually take the time to sell the vehicle.
Settling Unprotected Vehicle Equity with the Chapter 7 Trustee
It is possible to negotiate a payment to the bankruptcy estate that allows you to retain the car, but there is no guarantee that you would be able to do this. A settlement requires the trustee to agree and court approval of the settlement.
Reaffirming a Car Loan in Chapter 7
If your car has a loan on it, you may have to enter into a reaffirmation agreement with your lender if you want to continue your relationship with them and keep your car. In a reaffirmation, you and your lender agree that you will remain personally responsible for the loan after bankruptcy.
The downside of reaffirmation agreements is that you remain liable for the loan. So if anything happens in the future, you could still be liable for a deficiency if, for example, the car were later repossessed. Reaffirmation agreements have to be executed before discharge, and court approval is sometimes required. See 11 U.S.C. § 524(c).
"Before you reaffirm a car, think about whether you could keep making the payments on the loan if the car needed a major repair or if your income dropped. Keeping the vehicle now should only be part of the decision. Remember, you are deciding whether or not to remain personally liable for that debt after bankruptcy," Wright said.
Redeeming the Car With a Lump-Sum Payment
In Chapter 7, redemption allows you to keep a qualifying car by paying the lender's allowed secured claim in one lump sum. That amount is generally the lesser of the allowed debt and the vehicle's replacement value. Redemption can reduce what you must pay when you owe more than the car is worth, but you need a way to fund the lump-sum payment.
To be able to redeem your car, according to 11 U.S.C. § 722, the car must:
- Be intended primarily for personal, family, or household use.
- Secure a consumer debt that can be discharged in your bankruptcy case.
- Be exempted in the case or abandoned by the trustee, meaning the trustee doesn't have, or has released their interest in it on behalf of the bankruptcy estate.
Your lender's secured claim is determined by 11 U.S.C. § 506(a). The valuation of the vehicle is the replacement value, considering its age and condition.
Redemptions are usually done by filing a motion with the bankruptcy court under Federal Rule of Bankruptcy Procedure 6008. After the required notice and hearing process, the court can authorize redemption. If the lender disputes the redemption amount, the court will determine it based on evidence supplied by the debtor and the lender.
Example of Redemption: Assume your car qualifies for redemption, you owe $16,000, and the lender's allowed secured claim is $10,000. Paying that $10,000 in full at redemption would release the car from that lender's lien. You would need a way to fund the lump-sum payment; section 722 does not require the lender to accept installments.
Keeping Your Car Without Reaffirming
In some circumstances it may be possible to "retain and pay" your vehicle, but there isn't a guarantee. Retain and pay depends on applicable law, the loan agreement, the lender's response, and whether you complete the required bankruptcy steps.
Before you rely on retain and pay, find out whether the laws in your jurisdiction and your vehicle loan agreement allow the lender to repossess a vehicle even when your payments are current. You should also be sure to comply with your filed Statement of Intention and deadlines. Listing "retain and pay" on the Statement of Intention doesn't, by itself, establish a right to keep the car. See 11 U.S.C. § 521(a)(2), § 521(a)(6), and § 362(h).
What If You Are Behind on Car Payments?
Chapter 7 doesn't have a built in way to catch up car payments. If you file Chapter 7, are behind on car/vehicle payments, and want to keep your financed car, you should address the overdue payments promptly and determine whether your lender will accept a cure or another arrangement. Don't assume you can wait until your case closes. The lender may be able to repossess the vehicle once the automatic stay is over.
If you think you want to keep your car and you are behind, it may be worth looking at Chapter 13 which we will discuss next.
Keeping Your Car in Chapter 13
Chapter 13 offers several ways to help you keep your car in bankruptcy. Chapter 13 can help you address missed vehicle payments, can help you if you owe more than your vehicle is worth, and can address unprotected equity without having to surrender your vehicle.
Catching Up on Missed Car Payments
If you have past due car payments, Chapter 13 can help you catch up those payments through the Chapter 13 payment plan. In Chapter 13 you can propose a payment plan that lasts 3 to 5 years and provides for your past due vehicle payments. See 11 U.S.C. § 1322(b).
Reducing an Eligible Car Loan Through a Cramdown
If you owe more on your vehicle's loan than it is worth, a cram down can give you the ability to divide your vehicle loan into a portion that is secured based on the car's replacement value and an unsecured portion for the remaining balance. In a cram down, the unsecured portion of the vehicle loan would be classified as a general unsecured debt.
To qualify for a cram down for a car you purchased for your own personal use, you must have incurred that purchase loan more than 910 days before filing Chapter 13 to be able to reduce its secured balance to the car's value. See the paragraph following 11 U.S.C. § 1325(a)(9).
Hypothetical example: Let's assume you owe $20,000 on a car loan you incurred over 910 days before filing, for a car you acquired for your personal use, and the accepted replacement value of this vehicle is $13,000. A cramdown would effectively treat $13,000 as secured debt, payable with interest through the plan, and the remaining $7,000 would be treated as unsecured debt. How much of that $7,000 you repay depends on your plan. Any dischargeable remainder can be eliminated when you complete the plan and receive a discharge.
Keeping a Car With Unprotected Equity
If the equity you have in your vehicle is more than your jurisdiction's vehicle exemption, Chapter 13 can help you protect that equity and keep your car. This can be accomplished by filing a Chapter 13 plan that provides your unsecured creditors with at least the value they would receive if you filed Chapter 7. See 11 U.S.C. § 1325(a)(4).
Recently Financed a Car? Check the Lien Before Filing
If you recently bought or refinanced a car, check the lender's lien before you file. If the lender did not properly record their lien, or made some other mistake, this can put the vehicle at risk in Chapter 7.
A vehicle lender's lien gives it a secured interest in your vehicle as security for your loan with them. Perfecting the lien means completing all the steps necessary to protect that secured interest. For vehicles, this generally involves a state's title system.
What Happens If the Lender Did Not Perfect Its Lien?
If your lender didn't perfect their lien, a Chapter 7 trustee could challenge and set aside, or avoid, the unperfected lien under 11 U.S.C. § 544(a). The avoided lien is preserved for the bankruptcy estate under § 551. If the lien is avoided, selling the car could produce more funds for creditors, and therefore be worthwhile for the trustee to pursue.
"On every Chapter 7 trustee questionnaire that I've seen there is a question that asks when you purchased your vehicle. If your purchase was within the last few months, you can almost bet that the trustee will be checking to make sure that the vehicle lender properly perfected their lien on your vehicle," Wright said. "If you have a vehicle loan and you absolutely want to keep your vehicle, before filing it's probably a good idea to check to make sure your lender properly perfected their lien. I do this as a matter of practice," Wright continued.
Example: Assume you own a car worth $20,000 and you have a loan on it for $18,000. If the trustee successfully avoids the lender's lien, the estate can gain the benefit of that lien. The car may then be sold even if an exemption would have protected your original $2,000 in equity.
At this point you may be thinking that it may be a good thing for the lien to be avoided because the absence of the lien would mean that you now have more equity. Not so fast. Avoiding the lender's lien doesn't automatically turn its value into equity you can protect. When you voluntarily grant a lien, 11 U.S.C. § 522(g) restricts your ability to claim an exemption in the interest recovered by the trustee.
What Should You Check Before Filing?
Look at the purchase or refinancing agreement, current title, and any documents showing when the lender submitted its lien paperwork.
Your state's laws determine when lien perfection is effective, and some state laws protect a lender that completes the required steps within a certain period of time. Bankruptcy law recognizes certain protections of this kind in 11 U.S.C. § 546(b).
"As far as what you should check, loan statements tell you what you owe, but they don't tell you whether the lender properly perfected its lien. Especially with a recently financed car, checking the title records and filing dates can be just as important as checking your exemptions and the vehicle's value," Wright stated.
What If Your Car Is Facing Repossession?
The automatic stay is a federal injunction under 11 U.S.C. § 362(a) that prevents creditors from taking certain collection actions, including repossessing vehicles. Filing bankruptcy generally stops a repossession while the automatic stay is effective. Exceptions, repeat-filing limits, and termination of the stay can affect that protection.
You Still Need to Address the Car Loan
The bankruptcy stay gives you time to address the loan, but it doesn't address your car loan and its treatment in your bankruptcy case. As we saw above in the Chapter 7 and Chapter 13 sections, how your loan is treated will depend on the Chapter you file and how you have chosen to address it.
If you don't properly address your lender in the chapter you file, they could ask the court to be excused from the stay, usually through a motion for relief from the stay, to continue with collections. See 11 U.S.C. § 362(d).
If Your Car Has Already Been Repossessed
If your car has already been repossessed, it is possible to get it back, but there is not a guarantee. In City of Chicago v. Fulton, the Supreme Court held that retaining property seized before bankruptcy doesn't violate the stay (section 362(a)(3)). The decision also didn't eliminate separate obligations to return qualifying property under the Bankruptcy Code's turnover provisions.
If your vehicle was repossessed before filing bankruptcy, you or your attorney may need to seek a court order requiring return of the vehicle under 11 U.S.C. § 542(a).
"Once the car is repossessed, your options become fewer. Yes, it's possible in some jurisdictions to get the car back, but there's no guarantee. Do yourself a favor and look into what you might be able to do to save the car before the repo agent turns up," stated Wright.
Can You Keep a Leased Car in Bankruptcy?
Yes, you can usually keep a leased car in bankruptcy. Keeping a leased car usually involves assuming the lease, which means continuing to make the lease payment and accepting responsibility for the other obligations under the lease.
Keeping a Leased Car in Chapter 7
If you file Chapter 7 and want to keep your leased vehicle, you should let the leasing company know that you want to assume the lease in Official Form 108, which is the "Statement of Intention for Individuals Filing Under Chapter 7". File this form within the applicable deadline. Before or when you file it, serve a copy on the trustee and the creditors named in the statement, including your leasing company. This fulfills the requirement under 11 U.S.C. § 365(p)(2) that a Chapter 7 filer notify a creditor in writing that they desire to assume the lease, if done in a timely manner.
Although local procedures could vary, these are generally the steps to assume a lease in Chapter 7:
- Notify the leasing company in writing. Let the company know that you want to assume the lease and take responsibility for its obligations.
- The leasing company decides whether to allow assumption. It may notify you that it is willing to proceed. It can also require you to cure outstanding defaults, such as missed payments, on terms set by the lease. Your request does not require the company to accept.
- Follow up with written confirmation. Within 30 days after the leasing company notifies you that it is willing to allow assumption, notify the company in writing that you are assuming the lease. You must also satisfy any required cure terms.
Remember that when you assume the lease, you're personally taking on the obligation. Before completing the lease assumption, it might be a good idea to review the cure requirements, your ongoing payments, and other lease terms that have changed including lease charges.
Keeping a Leased Car in Chapter 13
You can propose assuming a vehicle lease in your Chapter 13 plan under 11 U.S.C. § 1322(b)(7).
If your lease payments are behind, assumption of the lease usually requires that you cure any lease payment arrears, or provide adequate assurance of a prompt cure. Don't assume you can spread overdue lease payments across the entire plan. See 11 U.S.C. § 365(b)(1).
Depending on your jurisdiction, you usually have to continue making lease payments to your leasing company during your Chapter 13 plan. Confirm how to make those payments with the Chapter 13 trustee. See 11 U.S.C. § 1326(a)(1)(B).
What Should You Review Before Filing?
Before you make a decision on Chapter 7, Chapter 13, or another option, get all of your information and any helpful documents together so you can evaluate your car situation alongside your other property, debts, and household expenses. These records can help you, or your attorney, get a big picture of your finances and identify any problems that could arise before you commit to anything. Here are some items to consider gathering:
- Your car's value and condition. Get a recent value for your vehicle that matches its model, trim, mileage, and condition. If there is damage, think about including repair estimates and photographs.
- Your loan or lease documents. These documents will help remind you of when your obligation started, and who your lender or lessor is for noticing. Having current loan payoff information and lease account statements is helpful for things like equity determination, Chapter 13 plan treatment and potential cramdown analysis.
- Ownership and lien records. As stated above, these can help prove ownership and lien perfection.
- Your history of moves between states. If you've recently moved, this can be helpful if you have to show that your exemption scheme choice is valid.
- Your household budget. Gather income records and monthly expenses, including insurance, fuel, maintenance, and repairs. This can be helpful in stepping back and seeing the big picture of your current financial situation and what you want to accomplish by filing bankruptcy.
- Urgent deadlines and previous cases. Flagging potential repossession can give you deadlines that need to be met. Knowing your actual previous bankruptcy dates, for example a previous bankruptcy filing date, case dismissal date, and discharge date, will help you determine if the automatic stay could be limited in your case.
Frequently Asked Questions About Cars and Bankruptcy
Can I Keep Two Cars in Bankruptcy?
It is possible, but depends on the circumstances. Each vehicle would need its own review of exemptions, ownership interest, loan balance and value.
For example, the federal vehicle exemption protects a debtor's interest in one vehicle. If available, the federal wildcard exemption could also protect equity in another vehicle, depending on the circumstances. State exemption rules can differ. See 11 U.S.C. § 522(d)(2) and (5). Any vehicle loans for second vehicles and Chapter 13 plan requirements will also have to be addressed, depending on the case.
Can I Get a Car Loan After Bankruptcy?
There isn't a set length of time you have to wait to buy a car, or finance a car after bankruptcy. You may even find that there are several opportunities to finance a car soon after bankruptcy. However, the loans available may have high fees and interest rates.
Compare the annual percentage rate, loan length, fees, and total payments across offers. A lower monthly payment can still mean paying more over a longer loan. The Consumer Financial Protection Bureau's guide to comparing auto financing explains the costs and disclosures to review.
Can I Buy a Car While My Bankruptcy Case Is Open?
Sometimes. In Chapter 13, it may be possible to get a new car and car loan if it is needed. The process for securing a new car and car loan depends on your local procedure. Usually you will have to obtain trustee and/or court approval before you commit to financing. A lender's willingness to approve the loan does not replace that process.
It is also possible to obtain a new car, and a new loan while in a Chapter 7 case, although the interest rates may not be favorable.