Can I keep my car in bankruptcy?

In Chapter 7 bankruptcy, most of your debts are discharged (canceled). In return, you must give up nonexempt property — the bankruptcy trustee sells the property and uses the proceeds to pay your unsecured creditors. In practical terms, this means almost all debtors keep their cars.

Whether you can keep your car in Chapter 7 depends on (1) whether your equity is exempt, and (2) whether you are behind in payments.

Is Your Car Equity Exempt?

If your equity in the car (your equity is the market value of your car minus your car loan) is significantly more than your motor vehicle exemption amount, the trustee may sell your car, give you your exempt portion, and use the remaining proceeds to pay your unsecured creditors.

In this situation, however, you may be able to use another exemption to make up the difference, get the trustee to accept other nonexempt property in return for keeping your car, or pay the trustee the amount of the nonexempt equity of your car.

Are You Behind in Your Car Payments?

If you are behind in your car payments, you will lose your car in Chapter 7 bankruptcy (even if your equity is exempt) unless you take care of the arrearage or get the lender to agree to some other payment plan.

Some options include:

Redeeming the Car

In Chapter 7 bankruptcy you can “redeem” your car, which means you pay your lender the current replacement value of the car. You can only do this if the car is exempt or the trustee has “abandoned” the property (decided not to sell it). Because this requires a lump-sum payment, however, it’s often not feasible for people considering bankruptcy. There are, however, several companies that will loan you the money to pay off the vehicle, often at a significantly lower rate than you’re paying right now.

Reaffirming the Debt

You can keep the car if you and the lender sign a new payment agreement. You can change the terms of your original contract in this agreement, but the lender has to agree. The downside: If you later default on the loan, you will be liable for the deficiency balance.