Filing for bankruptcy doesn’t mean that you’ll have to give up your car. But it’s not a given that you’ll be able to keep it either. Being able to retain your vehicle in bankruptcy depends on the amount of equity, whether you can continue paying the loan (if any), and the bankruptcy chapter that you choose to file.
When you file bankruptcy, you won’t be left destitute. Each state decides which property its residents can safeguard with bankruptcy exemptions. The state’s exemption list will cover key assets that you’ll need to maintain a home and job, such as clothing, household goods, electronics, work tools, retirement accounts, and, in most cases, some equity in a homestead and equity in a vehicle.
Exemption amounts vary by state. Even so, because most people don’t own high-status items such as recreational vehicles, boats, and luxury cars, bankruptcy debtors can often protect all—or at least most—property in bankruptcy. What happens to nonexempt property will depend on the bankruptcy chapter filed.
Whether you can keep the car will also depend on whether you owe money on it. A car loan is a “secure” loan, which means that if you stop paying it, the lender can sell the vehicle at auction and use the proceeds to pay the balance—even if you file for bankruptcy. So, you’ll need to be able to continue making your vehicle payments after filing, and, if you’re behind on your payments, you’ll have to find a way to bring them current (options discussed below).
Each chapter offers different benefits. Once you understand that you’ll have to pay for any car that you’d like to keep and you know how much equity you can protect, you’ll be ready to decide which bankruptcy option is best for you.
For instance, Chapter 7 bankruptcy is an excellent choice for those who can protect all equity and are current on payments. Chapter 13 bankruptcy works well if you’re behind on payments or you have a significant amount of nonexempt equity and would still like to keep the car.
Your vehicle will be protected in Chapter 7 bankruptcy if you’re able to exempt all equity and you own the car outright. If you can’t exempt all of your equity, the bankruptcy trustee appointed to your case will sell the vehicle and distribute the proceeds to your creditors.
Some trustees will allow you to pay for the nonexempt equity at a discount (the value minus costs of sale) using one of the following options:
If you’ve financed your car, you’ll need to take into account your car loan, too. You should be aware that a Chapter 7 case doesn’t have a mechanism to catch up on overdue payments (see Chapter 13 bankruptcy below).
Here are your three choices:
The discharge (debt forgiveness) timeline in Chapter 7 bankruptcy is approximately four to six months.
In Chapter 13 bankruptcy, you’ll pay into a repayment plan that lasts for three to five years. Not everyone will qualify, however, because this chapter requires you to prove that you have enough income to pay the amount required by the bankruptcy rules (listing all requirements is beyond the scope of this article).
Here are the options under this chapter:
Learn more about the Chapter 13 process by reading Chapter 13 Bankruptcy Timeline.