Can I Declare Bankruptcy and Keep My Car?

Many individuals consider bankruptcy for debt relief. A common concern is whether they can keep important assets, such as their car. Retaining a vehicle during bankruptcy involves understanding various legal and financial considerations. The specific type of bankruptcy filed and the vehicle’s financial characteristics play a significant role in determining its fate.

Factors Influencing Car Retention

Retaining a vehicle in bankruptcy depends on the nature of the debt. A car loan is typically a secured debt, meaning the vehicle acts as collateral for the loan. This provides the lender with a security interest, allowing them to repossess the car if payments are not made. Unsecured debts, in contrast, do not have specific collateral tied to them, such as credit card balances or medical bills.

Another significant factor is the equity in the vehicle, which represents the difference between its current market value and the outstanding loan balance. Positive equity exists when the car’s value exceeds the loan amount, while negative equity, or being “underwater,” means the loan balance is greater than the car’s value. The amount of equity influences how the vehicle is treated in bankruptcy, as creditors may have a claim on any unprotected equity.

Bankruptcy exemptions are legal provisions that allow debtors to protect a certain amount of value in their assets from being liquidated to pay creditors. These exemptions can apply to vehicles, and their availability and specific monetary limits vary depending on whether federal or state exemption laws are used. Debtors typically choose the set of exemptions that provides the greatest protection for their assets. For example, some jurisdictions offer a specific motor vehicle exemption, while others may allow a “wildcard” exemption to be applied to a car’s value.

Determining the vehicle’s accurate fair market value is also a necessary step in bankruptcy. The car’s fair market value is typically assessed, often by referencing industry guides like Kelley Blue Book or NADA Guides. This valuation helps establish the amount of equity, if any, that needs to be considered under exemption laws. An accurate valuation ensures that the bankruptcy court and creditors have a clear understanding of the vehicle’s worth.

Retaining Your Vehicle in Chapter 7 Bankruptcy

Individuals filing for Chapter 7 bankruptcy, also known as liquidation bankruptcy, have specific options for retaining their vehicle. One common method is entering into a reaffirmation agreement with the lender. This agreement is a new contract where the debtor agrees to remain personally liable for the car loan despite the bankruptcy discharge. The debtor continues to make regular payments according to the original loan terms, and the lender retains their lien on the vehicle.

For a reaffirmation agreement to be effective, it must be filed with the bankruptcy court and often requires court approval. The court will typically review the agreement to ensure it does not impose an undue hardship on the debtor or their dependents. If approved, the debtor remains obligated to pay the debt, and failure to do so can result in repossession of the vehicle and renewed personal liability for any deficiency balance.

Another option available in Chapter 7 is redemption, which allows the debtor to keep the vehicle by paying the lender its current fair market value in a single lump sum. This option is often beneficial when the vehicle’s market value is less than the outstanding loan balance, as the debtor pays less than the full amount owed. Funds for redemption are typically obtained through a new loan from a specialized lender or from exempt assets.

If neither reaffirmation nor redemption is feasible or desired, the debtor can choose to surrender the vehicle. In this scenario, the debtor returns the car to the lender, and the outstanding loan balance is discharged as part of the bankruptcy. Surrendering the vehicle eliminates the debt obligation, providing a fresh start without the burden of the car loan. This choice is often made when the vehicle is worth significantly less than the loan amount or when the debtor no longer needs the car.

Retaining Your Vehicle in Chapter 13 Bankruptcy

Chapter 13 bankruptcy, a reorganization bankruptcy, offers a structured approach for individuals to retain their vehicle by proposing a repayment plan. Under a Chapter 13 plan, the debtor makes regular, consolidated payments to a bankruptcy trustee over a period, typically three to five years. These payments cover various debts, including the car loan, and the trustee then distributes the funds to creditors. This process allows the debtor to catch up on any missed car payments and continue making ongoing payments through the plan.

A significant advantage in Chapter 13 for vehicle retention is the “cramdown” provision, which can reduce the principal balance of a car loan to the vehicle’s fair market value. This option is generally available if the car loan was incurred more than 910 days before the bankruptcy filing date. If the loan is older than this period, the debtor can pay only the current market value of the vehicle through the plan, with any remaining unsecured portion of the debt being treated as a general unsecured claim and often paid at a reduced rate or discharged.

For car loans taken out within the 910-day period, the cramdown provision typically does not apply, and the debtor must usually pay the full outstanding balance of the loan through the Chapter 13 plan. However, even in these cases, the Chapter 13 plan provides a mechanism to cure any arrearages and maintain possession of the vehicle. The interest rate on the secured portion of the loan may also be reduced to a market rate determined by the court, potentially lowering the overall cost of the loan within the plan.

The Chapter 13 repayment plan offers flexibility, allowing debtors to integrate their car payments into a broader financial restructuring. This provides a clear path to retaining the vehicle while managing other debts under court protection. Upon successful completion of the plan, the debtor receives a discharge of remaining eligible debts, and the car loan is considered satisfied according to the plan’s terms.

Specific Scenarios and Your Vehicle

Leased vehicles are treated differently in bankruptcy compared to owned vehicles with a loan. A car lease is considered an executory contract, meaning both the debtor and the leasing company have ongoing obligations. In bankruptcy, the debtor generally has two primary options for a leased vehicle: assume the lease or reject it. Assuming the lease means the debtor commits to continuing all lease payments and terms, often needing to cure any missed payments.

If the debtor chooses to reject the lease, they return the vehicle to the leasing company, and any remaining obligations under the lease agreement are discharged as part of the bankruptcy. This option can be beneficial if the lease payments are too high or if the debtor no longer needs the vehicle.

Owning multiple vehicles can complicate retention in bankruptcy, as exemption laws typically apply per debtor rather than per vehicle. If a debtor owns more than one car, they may need to apply available vehicle exemptions to cover the equity in each vehicle. It is common for only one vehicle to be fully protected by specific motor vehicle exemptions, requiring the use of general “wildcard” exemptions to protect additional vehicles or any remaining equity. The value of the vehicles and the available exemption amounts will determine which, if any, can be retained.

Co-signed car loans introduce another layer of complexity in bankruptcy. When a car loan is co-signed, both the debtor and the co-signer are legally obligated to repay the debt. If the debtor files for bankruptcy, their personal liability for the loan may be discharged. However, the co-signer remains fully responsible for the entire loan balance. In a Chapter 13 bankruptcy, a co-debtor stay may temporarily protect the co-signer from collection efforts while the debtor is in their repayment plan, but this protection typically ends upon discharge or if the case is dismissed.