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How to file for bankruptcy and keep your car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by offering you interactive financial calculators and tools that provide objective and original content. We also allow users to conduct research and compare data for free and help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The products that appear on this site are from companies that compensate us. This compensation may impact how and where products are displayed on this website, for example, for example, the sequence in which they be listed within the categories of listing in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other home loan products. But this compensation does have no impact on the information we publish, or the reviews you see on this site. We do not cover the universe of companies or financial offerings that could be accessible to you.

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5 min read published on March 20, 2023.

Writen by Mia Taylor Written by Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.

Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to manage their finances by providing clear, well-researched information that breaks down otherwise complex subjects into bite-sized pieces.

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If you’re considering alternatives, there are some which can prevent your vehicle from being repossessed even if you aren’t able to fully repay the auto loan. In some states, you might be able avoid repossession of your car through bankruptcy code exemptions, though the laws vary from state to state. Can you protect your car through bankruptcy?

Each Chapter 7 and Chapter 13 bankruptcy have provisions that you might be able keep a vehicle that you purchased with a secured loan.

How to preserve your vehicle through Chapter 7 bankruptcy Car loans are , meaning the car is pledged as collateral to secure the loan. Because the car serves to serve as collateral for the loan, it can be repossessed by the lender in the event that you fail to maintain payments on the debt. However, under Chapter 7, the most well-known bankruptcy for people has a number of alternatives to keep your car. «To keep your car while going through Chapter 7, the debtor has to be current and stay current with the lender and perform a’redemption that involves paying back the lender or executing a ‘reaffirmation,’ which can involve altering the loan terms, but this will require lender approval,» says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. This is how reaffirmation and redemption works: Redemption: The process of pursuing redemption is a way to pay your creditors for the car’s actual reasonable market value. If you can afford to make this happen it could make your life simpler in the future since you’ll have eliminated car payments. But because most people file for bankruptcy in a time where cash is not readily available, this may not be an option for you. Reaffirm: This option allows you to continue to pay on your loan as before filing for bankruptcy. When you reaffirm your debt, you agree to make payments according to a timetable that you and your creditor that could include amended loan terms. Bankrate’s tip

If neither option works for your financial situation You can also surrender your vehicle to the creditor and get the debt wiped off.

«When you get a Chapter 7 Discharge, you are no longer liable for personal obligation to pay the loan,» says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. «All the creditor is able to do is take their collateralthat is, your vehicle. They are not able to pursue you for cash.» Exemptions from bankruptcy you file for Chapter 7, your assets are sold off or liquidated to pay your creditors. The bankruptcy court will allow the holder to retain a specific amount of your property up to a certain monetary value, according to Debt.org. This is called»exemption. «exemption.» This is the maximum federal exemption is $4,000. However, many States have their own exempt limit that must be adhered to — some states’ exemptions are more than $4,000 while some are lower. What you can expect to receive for your car in bankruptcy filings does not depend on the price the price you spent on it. In many states, the value is determined by the actual value of the vehicle determined by factors like the year, model, and mileage. Car industry sources like Kelley Blue Book or Edmunds may also be used to help determine the value of your vehicle. If the value of your vehicle is determined to be less than your state’s exemption limit, you’ll be able to keep the car even when you file for bankruptcy. In contrast in the event that the car is worth more than the exemption, the bankruptcy trustee could decide to sell the car to you pay off your creditors. This is how it works If the state’s exemption is $4,000, and your vehicle’s worth is $2,000, then you’ll likely be able to keep the car because it’s value is less that the amount of exemption. If, on the other hand the exemption for your state is $4,000 and your vehicle is valued at $10,000, a bankruptcy trustee may sell the car and utilize the proceeds to pay off debt. Reasons you wouldn’t keep your car in Chapter 7 bankruptcy Keeping your car isn’t always possible when you file Chapter 7 bankruptcy. Plus, sometimes it simply doesn’t make sense financially to hang on to the car. In the process of deciding on these issues the worth of your vehicle and the equity in your car will play an important role. The equity in your car and bankruptcy are similar to a mortgage on an investment property equity is determined by subtracting the remaining amount owe on the loan from the car’s present market value. «For instance, if you own a car that has an estimated fair market value of $10,000, and an outstanding $1000 loan amount, you’ll have $9,000 equity,» says Rosenblum. When the equity value is greater than the exemption the bankruptcy trustee can decide to sell the vehicle and use the proceeds towards paying off your debts. It doesn’t make financial sense keeping the vehicle.. Finally, it’s also worth bearing in mind that if your vehicle’s current fair market value is on the car loan then keeping the car will not be a smart financial decision. «Very often it is the case that the loan balance is more than the value of the car and, without the funds or desire to keep the car the filer lets go of the vehicle,» says Michael Sullivan an expert in personal finance with the nonprofit financial counseling firm Take Charge America. How do you keep your car through Chapter 13 bankruptcy Chapter 13 bankruptcy offers a variety of options for keeping your car. «The Chapter 7 framework is the basis of Chapter 13,» says Rosenblum. «But with Chapter 13, you reorganize your debt.» Making an installment plan as part of Chapter 13 debt reorganization, the three-to-five-year repayment plan will be created that factors in your earnings and assets. The goal of this Chapter 13 process is to let you keep your possessions, including your car, and pay off your debt. If you’re in a position to fall behind on payments, the plan will require you to catch up and pay on time moving forward. The terms that apply to the loan The court may also require that the lender amend the car loan terms, including decreasing the interest rate this is another method to aid in keeping the car. The terms will be revised, and the monthly payments will be less. «A Rewrite of the debt owed to the lender could be done via the process of a Chapter 13 plan, and market terms may be imposed upon the lender,» says Hawkins. Reducing the loan balance The process of changing auto loan terms as part the process of Chapter 13 may also include the process called»cramdown. «cramdown,» which reduces the amount you have to pay to the lender according to the vehicle’s fair market value. The timing of your car purchase is a significant factor when it comes to the process of cramdown. In particular, there’s a 910 rule that applies to Cramdowns. Newer cars: If you bought your car within 910 days after your bankruptcy filing, you must be able to pay the entire amount of the loan but the interest rate could be reduced. Older cars: If you purchased your vehicle more than 910 days prior to filing for bankruptcy, you’re only required to repay the car’s current fair market value. There are a variety of reasons why you should not keep your vehicle during Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your vehicle when trying to file for Chapter 13, or hanging on to your car might not make sense. Examples of when this may be the case include: Your loan has been in arrears, and you don’t have the money for bringing the loan current or to make ongoing monthly payments. In this situation it is possible to sell the car. The car isn’t in good shape or is not reliable. In these conditions, giving up the car may be a better option. The car is particularly valuable, and selling it would provide the funds for the repayment of your debts. You own a substantial equity in the vehicle, which is greater than the bankruptcy exemption levels in the state you reside in. The most important thing to remember is Filing bankruptcy does not mean a car purchased with secured loan can be taken away. Under each of the Chapter 7 and Chapter 13 bankruptcy codes, provisions protect your car. Consulting a bankruptcy attorney can help you decide which bankruptcy option is most appropriate for your personal financial situation.

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Written by a Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.

Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to take control of their finances through providing concise, well-studied and well-researched content that breaks down otherwise complex subjects into bite-sized pieces.

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