Bankruptcy & Keeping Cars

When you file bankruptcy, you don't have to lose everything you own. In fact, you may be able to keep a substantial amount or even all of your property, including your car. Best of all, you usually have the option over how you want to handle the disposition of your car in bankruptcy.

If You Own Your Car Outright

If you own your car outright, you may stand a greater chance of losing your car in bankruptcy. When you file Chapter 7 bankruptcy, you can only keep the assets that your state allows you to, through the use of bankruptcy exemptions. The amount of the exemption is based on the net equity you possess in the asset. For example, if you own a $7,000 car and are no longer making any payments on it, you have $7,000 of net equity in that car. If your state only allows a car exemption of $3,000, the trustee has the right to seize your car, sell it, and return the $3,000 of protected value to you as cash. To keep a car that you own free-and-clear in a Chapter 7 bankruptcy, it must be worth less than the allowable exemptions in your state.

If You Want to Keep Making Payments

Bankruptcy can have little effect on your car if you want to keep making payments. Generally, you can strike an agreement with your lender and the bankruptcy court to keep making your payments in exchange for the lender not repossessing the car. The net effect of this process, which is known as reaffirmation, is that your relationship with your creditor will be essentially the same as it was before you filed bankruptcy. The only hitch in reaffirmation is that you are abandoning the protection of your bankruptcy protection regarding this specific debt. In other words, your are still legally responsible to fulfill the terms of your car loan.

If You Can Afford to Buy Your Creditor Out

One way to both take advantage of your bankruptcy discharge and keep your car is to buy out your creditor. Through this option, known as redemption, you pay the fair market value of your vehicle to your creditor. In exchange, you receive the title to the car, free and clear. Your bankruptcy discharge will take care of any excess debt you owe your creditor, and you will not have to pay that amount. For example, if your car is worth $6,500 and you owe $7,000 on your car loan, your bankruptcy discharge legally removes your responsibility to pay that final $500.

Walking Away

The final option regarding a car in a Chapter 7 bankruptcy is to simply walk away from your debt. Your creditor is entitled to take the car back, but you do not have any legal liability for your car loan, which is incorporated into your bankruptcy discharge. This option is known as surrender.

Chapter 13

Chapter 13 bankruptcy handles assets such as cars in an entirely different manner. If you own your car outright, you can keep it in a Chapter 13, since the court lets you keep all your assets. If you are financing or leasing the car, you can include your car payments in your Chapter 13 payment plan. In some cases, you may not even have to pay the full amount you owe.

References

• United States Courts: Chapter 7 Bankruptcy
• United States Courts: Chapter 13 Bankruptcy
• Bankruptcy In Brief -- A Service of the Moran Law Group: Dealing With Secured Debts in Chapter 7
• Bankruptcy In Brief -- A Service of the Moran Law Group: What Happens to Assets That Have Non-Exempt Equity?
• Bankruptcy In Brief -- A Service of the Moran Law Group: Exemptions
• TotalBankruptcy.com: Cars in Bankruptcy