Can I Keep My Car After Filing Chapter 7?

Filing for Chapter 7 bankruptcy offers individuals a path to discharge certain debts and achieve a financial fresh start. A common concern for many is retaining essential assets, particularly their car. Keeping a car during Chapter 7 bankruptcy is frequently possible, but it depends on several factors and requires understanding specific legal procedures.

Determining if You Can Keep Your Car

Keeping a car in Chapter 7 bankruptcy depends on its value and any outstanding loans. Market value is typically determined using guides like NADA Guides or Kelley Blue Book. Equity is the difference between market value and the remaining loan balance. If a car is worth $7,000 and has a $3,000 loan, the equity is $4,000. High equity can be a challenge, as it represents an asset for creditors.

Car loans are secured debt, with the vehicle serving as collateral. Lenders retain a lien, allowing repossession if payments are not made, even during bankruptcy proceedings. A secured loan impacts how the car is treated in Chapter 7.

Bankruptcy exemptions protect assets from trustee sale, allowing debtors to keep a specified amount of equity. Debtors typically choose between federal or state-specific exemptions. For example, the federal motor vehicle exemption allows a debtor to protect up to $5,025 in equity in one personal car or truck as of April 1, 2025.

The chosen exemption amount is applied to the car’s equity. If equity is less than or equal to the exemption, the vehicle is exempt and protected from sale. For instance, if a car is worth $7,000 with a $3,000 loan, the $4,000 equity would be fully protected by the $5,025 federal motor vehicle exemption. If equity exceeds the exemption, the excess is non-exempt. The trustee may sell the vehicle to distribute funds to creditors, paying the debtor the exempted amount from the sale proceeds.

Your Options for Retaining a Vehicle

Several options are available for retaining a vehicle.

A reaffirmation agreement is a voluntary agreement between the debtor and car loan lender. It allows the debtor to continue payments despite bankruptcy discharge, retaining the vehicle and the loan obligation. Reaffirming the debt means the debtor remains personally liable for the loan, even if the car is repossessed later. Court approval is often required, particularly if the debtor is unrepresented or if the court questions the affordability of the payments.

Another option is redemption, which involves paying the lender the current market value of the car in a single lump sum. This redeems the car from the lien, allowing the debtor to own it free and clear. Redemption is often used when the car’s market value is less than the outstanding loan balance, as it allows the debtor to pay less than the full amount owed. Funds for redemption are typically obtained through a new loan from a specialized lender or from personal savings.

Surrender is the option to return the car to the lender. This discharges the debtor’s personal liability for the car loan, ending payment obligations. The lender takes possession of the vehicle, and any remaining loan balance after the car is sold by the lender is typically discharged in the bankruptcy. This option is frequently chosen if the car has negative equity (meaning more is owed than the car is worth) or if the loan payments are no longer affordable.

Navigating the Car Retention Process

Retaining a car in Chapter 7 bankruptcy begins with a consultation with a bankruptcy attorney. During this consultation, provide all vehicle details: make, model, VIN, mileage, outstanding loan balance, and lender information. This information completes required bankruptcy schedules (e.g., Schedule A/B for assets, Schedule D for secured debts) filed with the court.

Filing the Statement of Intention (Official Form 108) is a procedural step. This document communicates the debtor’s plan for secured property: reaffirm, redeem, or surrender. The Statement of Intention must generally be filed within 30 days of the bankruptcy petition or by the date of the Meeting of Creditors, whichever occurs earlier. This filing provides formal notice of the debtor’s choice to the court, the bankruptcy trustee, and the lender.

The Meeting of Creditors (341 Meeting) is a required appearance where the debtor meets with the bankruptcy trustee and, sometimes, creditors. During this meeting, the trustee reviews the car’s reported value and the debtor’s stated intention. The trustee ensures non-exempt assets are identified and handled appropriately.

If reaffirming the debt, the debtor and lender draft and sign a reaffirmation agreement. If represented by an attorney, the attorney must certify the debtor has been fully advised of consequences and the agreement does not impose undue hardship. Court approval is often required, especially for unrepresented debtors or if the court determines the agreement is not in the debtor’s best interest. The signed agreement must be filed with the court by a specific deadline, typically before the discharge is entered.

For redemption, securing funding for the lump sum payment might include obtaining a specialized redemption loan. After securing funds, a motion to redeem the property is filed with the court, requesting approval to pay the lender the car’s market value to satisfy the lien. Once approved, the payment is made to the lender, and the lien is cleared.

If surrendering the car, the debtor notifies the lender of intent to return the vehicle and arranges its return. The lender will then take possession of the car. The bankruptcy discharge eliminates the debtor’s personal liability for any remaining loan balance after the car is sold. After reaffirmation or redemption, the debtor continues ownership and payment obligations as agreed, with the terms of the reaffirmed or newly acquired redemption loan governing future payments.