Can I File Bankruptcy And Keep My Car?

When you file for bankruptcy, your assets may be seized to pay back a portion of your debt depending on their value and your state’s laws. You can sometimes file for bankruptcy and keep your car if your state’s bankruptcy exemption limit is higher than your car’s equity. But other factors, including the type of bankruptcy you’re filing and the amount you owe on your auto loan, can also play a role in whether you keep your car after filing for bankruptcy.

What Happens To Your Car If You File Bankruptcy?

Exactly what happens to your car if you file for bankruptcy will depend on factors such as:

• The type of bankruptcy being filed (either Chapter 7 or Chapter 13)
• Whether the vehicle owner owns the car outright or has an auto loan (and the amount they owe on the loan, if applicable)
• The car’s value
• The car’s equity
• The state’s bankruptcy exemption limits on property

For your exact scenario, it’s best you consult a bankruptcy attorney to determine your financial situation and what will most likely happen.

Filing Chapter 7 Bankruptcy If You Have A Car Loan

If you file for Chapter 7 bankruptcy, you will have certain unsecured debts cleared, though that means that you may have to either sell or give up specific assets to cover those debts. Depending on your local bankruptcy laws, you may be exempt from having to give up the equity in your car if you have kept up to date on your car loan payments.

You may also be able to keep the car if it is less than the exemption amounts stipulated by local bankruptcy laws.

Bankruptcy Exemption Limits  

Bankruptcy exemption limits are set by your local and state governments. These limits are generally determined through a formula which takes into consideration your payment history and equity you have in your car.

First, you'll need to determine how much equity you have to see whether you fall within the exemption limits. To do so, take your current auto loan balance and subtract it from the value of your vehicle. That amount is your equity. Use this number to compare it against your state’s exemption limits — you may need to contact your state legislature to find out. If your vehicle’s equity is lower than the limit, you may be able to keep the car. If your car’s equity is above these limits, you may have to either give up your car or negotiate with the trustee — the person in charge of your bankruptcy proceedings — to work out a plan. 

Filing Chapter 7 Bankruptcy If You Own The Car

If you own the vehicle outright, then whether you can keep your car will depend on the value or equity. If the current value of your car (equal to your equity since you own the car) is lower than the exemption limits, you're likely in the clear. Otherwise, you may be forced to sell the car to pay off creditors.

Can I File Chapter 13 Bankruptcy And Keep My Car?

Filing Chapter 13 means you will agree to a debt repayment plan to pay off your creditors instead of having to liquidate certain assets to pay them back. You will work with the relevant parties to reorganize your finances in order to begin the repayment of your loans. Meaning, you will most likely be able to keep the car as long as you are current with payments.

In some cases, depending on your lender and state laws, you may be able to have the amount you owe on your auto loan reduced, especially if you owe more than the car's current value. For those who aren't able to adhere to the terms of their auto loan, the car could be repossessed. If you own the car outright, then you can keep your car.

How To File Bankruptcy And Keep Your Car: 4 Steps

Use the following steps to determine whether you may be able to keep your car when filing for bankruptcy.

1. Review Your State’s Bankruptcy Exemption Limits

You can find your state’s bankruptcy exemption limits through its legislature website. Keep in mind that some states use the federal bankruptcy exemption limits. You may also be able to find out more information through your state’s bankruptcy court.

2. Figure Out Your Car’s Value

Once your car drives off the lot, your car will already depreciate in value (and will continue to do so over time), so any estimates you make could change. You can use reputable third-party sources such as Kelly Blue Book to estimate your car’s current value.

3. Calculate The Equity In Your Car

Once you have the value of your car, you will need to look at your current loan balance. Then, subtract the car’s value from what you owe. That’s the equity you have in your car. If you own the car outright, the car’s current value is your equity.

4. Determine Whether Your Car Is Exempt

If your car’s equity exceeds the exemption limits, the person who manages your bankruptcy proceedings may choose to sell your car and give you the exempted amount. The remainder will be used to pay your creditors. Or, you may be able to pay off some of your car's equity so you can keep your vehicle.

For example, if your state’s exemption limit is $3,000 and your car’s equity is $2,900, you are under the limit, so you should be able to keep your car. However, if the equity is $4,500 you are now over the limit and will need to follow your bankruptcy trustee’s lead on what to do.

However, if you're behind on your payments, the lender has the right to repossess your vehicle even if your equity is below the exemption limits. You can try to get current on your loan by catching up with your payments, but this is something you’ll have to work out with your lender. Of course, you can voluntarily give up your vehicle so you’re not responsible for additional car loan payments, although that guarantees that you’ll be without a car.

FAQs: Keeping Your Car And Filing Bankruptcy

Below are some frequently asked questions about filing for bankruptcy and the circumstances under which a car owner may be able to keep their vehicle.

When will I lose my car in Chapter 7 bankruptcy?

You may lose your car if you file Chapter 7 bankruptcy if your car’s equity is higher than your state exemption limits, or if you aren’t current on your auto loan payments.

What do I do if I have a nonexempt vehicle?

If you have a nonexempt vehicle when filing for bankruptcy, you may have to sell the car to pay off your creditors or work out an agreement with your lender to continue making loan payments and still be able to keep your car.

What is the best way to protect my car in bankruptcy?

You can protect your car in bankruptcy by making sure you're current on your loan payments or paying off your car to own it outright (if this is feasible).

The Bottom Line

Whether you are allowed to keep your car during bankruptcy depends on factors such as the type of bankruptcy and the current status of your auto loan. If you need help keeping on top of car loan payments to protect your vehicle, consider using the Rocket Money℠ app to track payments and other expenses. Other features, such as the budgeting tool, can also be useful for managing your personal finances when trying to avoid or overcome bankruptcy.

Create a Rocket Money account and download the app today.