Can I File Bankruptcy and Keep My Car?
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It is possible to keep your car in bankruptcy. If you have a car and are considering filing bankruptcy, of course, a natural consideration is whether or not you can file bankruptcy and keep your car. You probably need your car, truck, van or motorcycle to get to and from work, take the kids to school, and run errands.
How to File for Bankruptcy and Keep Your Car
The strategy for keeping your car is not absolute. It depends on your situation, including the chapter you file, the bankruptcy exemptions available to you, and the amount of equity you have in the vehicle.
Since chapter 7 and chapter 13 are the most common chapters of bankruptcy, we will discuss how to keep your car in both chapter 7 and chapter 13.
Chapter 7 and Keeping Your Car in Bankruptcy
Chapter 7 is the most filed chapter of bankruptcy by far. In this popular chapter, assets are dealt with differently than other chapters. Chapter 7 is considered a "liquidation" chapter of bankruptcy. Here, there is not a payment plan to dispose of nonexempt assets (assets that do not have protection). Instead, a chapter 7 trustee is appointed to sell nonexempt assets and distribute the proceeds to creditors.
Therefore, whether or not you may keep your car in chapter 7 depends on how much equity you have in your vehicle, and whether or not there is an exemption available to you to protect it.
Example of Bankruptcy Exemptions Protecting Car Equity in Chapter 7
Let's assume for example that I file chapter 7 bankruptcy in the state of Arizona, and that I have one vehicle with a total of $10,000 of equity (the difference between what the car is worth and what I owe). Since Arizona bankruptcy exemptions give Arizona residents a $16,500 vehicle exemption, my car would be protected and I would not have to surrender the vehicle in chapter 7.
Example of Bankruptcy Exemptions Not Protecting Car Equity in Chapter 7
Assume now that I have $20,000.00 of equity. In this situation, the full $20,000 of vehicle equity would not be protected by the Arizona exemption because the exemption protects only $16,500 of vehicle equity. In this case, the trustee could demand that I turn over the car. Alternatively, I may be able to pay the trustee the $3,500 of non-exempt equity and keep the car.
Reaffirmation Agreements Could Be Required in Some Jurisdictions
Reaffirmation agreements are contracts between a debtor and a creditor that allow the debtor to keep certain assets, like a car, by agreeing to continue making payments on the associated debt.
In some jurisdictions, or with some lenders, a reaffirmation agreement may be necessary if you want to keep making payments and keep the vehicle after Chapter 7. This is not the same in every case, so you should ask a local bankruptcy attorney whether reaffirmation is required or advisable in your situation.
Chapter 13 and Keeping Your Car in Bankruptcy
Chapter 13 is a three to five year payment plan. As you saw above, when assets aren't protected by exemptions, they usually get sold by the trustee. Chapter 13 is different because if there are assets that don't have exemptions, filers may make up for the nonexempt amount in their chapter 13 plan.
Example of Keeping Your Car in Chapter 13
Assume the same situation above, except that I have $20,000 of equity in my vehicle. Here I will also apply my $16,500 Arizona vehicle exemption to the vehicle, and after doing so I am left with $3,500 of equity in the vehicle that is not protected.
Instead of surrendering the car to the trustee, I can make up that $3,500 through my plan payments during my three to five year chapter 13 case.
Chapter 13 and Paying Back Vehicle Arrears
Chapter 13 also allows debtors to pay back past due vehicle loan payments through their plan. This is especially useful for someone who is behind on car payments and is facing potential repossession.
Example of Keeping Your Car in Chapter 13 by Paying Back Arrears Through the Plan
Assume that Bob files a chapter 13 in California, has one car with $15,000.00 of equity, and the car is 90 days past due with a repossession right around the corner.
In this situation, Bob files a chapter 13 right before his vehicle is repossessed. Once the case is filed, Bob's car is protected by the automatic stay (bankruptcy protection) and the vehicle creditor can no longer repossess the vehicle.
In chapter 13 Bob uses "System 1" of California's bankruptcy exemptions, proposes a plan that pays 100% of the remaining balance of his car's loan, 100% of the vehicle arrears, and the plan also provides $6,375.00 (the amount Bob is over exempt) to unsecured creditors. Since Bob's plan provides for payment of the car loan, the car's arrears, and provides the amount that Bob is over his exemption, the chapter 13 plan is confirmed by the court.
Do Not Guess Whether Bankruptcy Will Cost You Your Car
Many people are told by friends, co-workers, family members, or online commenters that filing bankruptcy means they will automatically lose their car. That kind of advice can be scary, but it is often incomplete or wrong.
Whether you can keep your car usually depends on the facts: the car’s value, the loan balance, the equity, the bankruptcy chapter, and the exemptions available in your state. The video below explains why guessing can lead people in the wrong direction and why estimating your vehicle equity is a better starting point.
Estimate Whether Your Car Equity May Be Protected
If you are wondering how much of your car's equity you can protect with bankruptcy exemptions, you can use our free Vehicle Exemption Estimator tool below. Enter your information and the tool will estimate how much of your car’s equity may be protected by bankruptcy exemptions, and how much may be unprotected. It is not legal advice, and it cannot replace a review by a local bankruptcy attorney, but it can help you understand the basic issue before you decide what to do next.
Should I Consult with a Local Bankruptcy Attorney About Keeping My Car in Bankruptcy?
Hiring a bankruptcy attorney is not required in every case, but it is often recommended. When it comes to protecting your vehicle, their guidance on the exemptions available to you could be invaluable. They offer guidance specific to your financial situation and the local laws where you live.
Is It Important to Accurately Value My Car?
Having an accurate valuation of your car is essential in a bankruptcy case. The valuation affects exemption claims and your payment obligations. Accurate assessment prevents issues with creditors and helps you plan how to protect your vehicle. Incorrect valuations could lead to disputes or asset liquidation.
How Can I Accurately Value My Vehicle?
Several methods can help determine your car’s worth, including market research and professional appraisals. The more precise the valuation, the stronger your bankruptcy case. Many times reputable online tools can provide a good estimate of your car's value, but for some cases, especially when the value is close to the exemption limit, a professional appraisal may be advisable to ensure accuracy.
Frequently Asked Questions About Cars and Bankruptcy
How Long After Bankruptcy Can I Buy a Car?
In many cases, you can buy a car after bankruptcy sooner than people expect, but the timing depends on the type of bankruptcy, whether your case is still open, your income, your credit profile, and the lender’s requirements. Some people receive car loan offers shortly after a Chapter 7 discharge, but those offers may come with higher interest rates, larger down payments, or less favorable terms.
The better question is often not just how soon you can buy a car after bankruptcy, but whether the loan terms make sense. Before taking on a new car loan, compare offers, review the total cost of the loan, and make sure the payment fits your post-bankruptcy budget.
Can I Get a Car Loan After Bankruptcy?
Yes, many people can get a car loan after bankruptcy, but approval and loan terms depend on the lender, your income, your credit history, your down payment, and how recently the bankruptcy was filed or discharged. A bankruptcy can stay on a credit report for up to 10 years, so lenders may treat the application as higher risk. That can mean higher interest rates or less favorable loan terms.
If you need a car loan after bankruptcy, it is usually wise to shop carefully, avoid rushed decisions, and focus on the total cost of the loan rather than only the monthly payment. Making payments on time after bankruptcy can also be an important part of rebuilding credit.
Can I Buy a Car While in Bankruptcy?
Sometimes, but it depends heavily on the chapter of bankruptcy and the rules in your case. In a Chapter 7 case, the bankruptcy process is often relatively short, so some people wait until the case is discharged before financing a vehicle. If the case is still open, you should talk with your bankruptcy attorney before taking on new debt.
In Chapter 13, buying a car while the case is active usually requires permission from the Chapter 13 trustee, the bankruptcy court, or both, depending on local procedure. This is because Chapter 13 is a multi-year repayment plan, and new debt can affect your ability to make plan payments.
If your current car breaks down or you need reliable transportation for work, buying a replacement vehicle during bankruptcy may be possible. However, you should not sign a new loan agreement during an active bankruptcy case without first getting legal guidance and any required approval.