Can I Lose My Car If I File Bankruptcy?

Filing for bankruptcy is a significant financial decision, often raising concerns about losing personal possessions. The fate of one’s vehicle is a common concern, as cars are essential for daily life. While bankruptcy addresses debts, legal provisions exist to help individuals retain their vehicles, depending on various factors and the type of bankruptcy filed.

Understanding Exemptions

When filing for bankruptcy, specific laws known as exemptions protect certain assets from being liquidated to pay creditors. These exemptions are designed to ensure debtors can retain basic necessities to maintain a household and employment after bankruptcy. The ability to keep a car largely depends on how its value aligns with these exemption limits.

Debtors generally use either federal or state exemption laws, though some states mandate the use of their own specific exemptions. For example, the federal motor vehicle exemption allows a debtor to protect up to $5,025 in equity in a vehicle as of April 1, 2025.

Equity in a car is calculated by subtracting any outstanding loan balance from the vehicle’s current market value. For instance, if a car is valued at $10,000 with a $6,000 loan, the equity is $4,000. This equity is then compared against the applicable motor vehicle exemption.

Beyond a specific motor vehicle exemption, a “wildcard” exemption may also be available. This exemption can be applied to any property, including a car, if the motor vehicle exemption is insufficient or if the debtor wishes to protect other assets. For example, the federal wildcard exemption is $1,675 plus an additional $15,800 of any unused portion of the federal homestead exemption, as of April 1, 2025. This flexibility allows debtors to combine exemptions to protect their vehicle’s equity.

Car Treatment in Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves a trustee gathering and selling a debtor’s non-exempt assets to distribute the proceeds to creditors. The treatment of a car in Chapter 7 depends heavily on whether its equity is fully covered by available exemptions. If a car’s equity is entirely exempt, the debtor can generally keep it, as the trustee has no non-exempt value to liquidate.

If the car’s equity exceeds the exemption amount, the trustee may sell the vehicle. In such cases, the trustee would pay the debtor the exempt portion, use the remaining funds to cover sales costs and administrative fees, and then distribute any leftover money to creditors. However, if the non-exempt equity is minimal, or if selling the car would not generate substantial funds for creditors after accounting for the loan, exemptions, and sales costs, the trustee might choose to “abandon” the asset, allowing the debtor to keep it. Debtors may also negotiate with the trustee to pay the non-exempt equity to keep the car.

For cars with outstanding loans, a debtor in Chapter 7 has specific options. One common choice is a reaffirmation agreement, a legally binding contract where the debtor agrees to continue making car loan payments as if bankruptcy had not occurred. This agreement must be court-approved. If signed, the debtor remains personally liable for the debt, meaning the lender can repossess the car and pursue any deficiency balance if payments cease.

Another option is redemption, where the debtor pays the lender the car’s current market value in a lump sum, eliminating the lien and keeping the car free and clear. This is often used when the car is worth less than the loan balance. Debtors can also choose to surrender the car to the lender, discharging the loan debt.

Car Treatment in Chapter 13 Bankruptcy

Chapter 13 bankruptcy, known as a wage earner’s plan, allows individuals with a regular income to reorganize their debts and repay them over a period, typically three to five years. A primary advantage of Chapter 13 is that debtors generally keep all their property, including their car, as long as they adhere to the repayment plan. The plan outlines how secured debts, like car loans, will be handled.

Car loans can be incorporated into the Chapter 13 repayment plan. Debtors might pay their car loan directly to the lender outside the plan, or payments can be included within the plan, with the trustee distributing funds.

A feature in Chapter 13 for car loans is the “cramdown” option. This allows debtors to reduce the outstanding loan balance to the vehicle’s current market value, provided the loan was incurred more than 910 days (approximately two and a half years) before the bankruptcy filing. The remaining balance is then reclassified as unsecured debt, typically paid a lower percentage or discharged at the end of the plan.

Chapter 13 also provides a mechanism to address past-due car payments, known as arrears. If a debtor is behind on car payments, these arrears can be spread out and paid over the three-to-five-year plan, allowing the debtor to catch up and prevent repossession. Chapter 13 plans can also allow for a reduction in the interest rate on car loans, making monthly payments more manageable.

Key Factors in Keeping Your Car

Several factors influence whether an individual can retain their car during bankruptcy proceedings. The amount of equity in the car is a primary determinant. If the car’s market value, minus any loan, falls within the applicable motor vehicle and wildcard exemption limits, it is more likely to be protected from liquidation.

The status of the car loan at the time of filing is also important. Being current on payments provides more options, particularly in Chapter 7 where lenders may be more amenable to reaffirmation agreements. For those with past-due payments, Chapter 13 offers a structured way to catch up on arrears through the repayment plan.

The car’s market value directly impacts how much equity needs to be protected by exemptions. Higher-value vehicles with substantial equity are more challenging to protect in Chapter 7 if that equity exceeds exemption amounts. For secured loans, the vehicle itself serves as collateral. The debtor’s income also plays a role, especially in Chapter 13, as it determines the feasibility of making plan payments to retain the vehicle.