How Long Can I Keep My Car After Filing Chapter 7?

Filing bankruptcy is a difficult decision, even for people in dire financial straits. You may worry about keeping your house and car in a Chapter 7 or Chapter 13 bankruptcy case. You may also be concerned about whether the Bankruptcy Court will approve your bankruptcy petition, giving you the much-needed fresh start you’re hoping for.

Regardless of the type of bankruptcy you file, there is a good chance you’ll be able to keep your motor vehicle. As long as your equity is exempt and you stay current, you can often keep your car by reaffirming with the lender or redeeming it.

This article explains how the Chapter 7 bankruptcy process works and how it impacts your car loan. It also discusses the factors the bankruptcy trustee considers when deciding whether reaffirming your auto loan makes sense.

If you’ve already filed for Chapter 7 bankruptcy or are considering it, contact a local bankruptcy attorney for help. We’ve also included helpful links to related FindLaw articles at the bottom of the page.

Factors That Determine Whether You Can Keep Your Car After Bankruptcy

Whether you can keep your car after filing Chapter 7 bankruptcy depends on several factors. These include its value, whether you are currently behind on payments, and your state’s bankruptcy laws.

You can often keep your vehicle after your Chapter 7 bankruptcy case is over if you meet the following criteria:

• Your equity is exempt and you reaffirm or redeem
• You stay current on your car payments

If you are late on your car loan, the creditor may decide to repossess your car and sell it to help pay off your auto loan balance.

In addition to being current on payments, the equity you have in your car must be exempt from debt collection.

Nonexempt Property

During a Chapter 7 bankruptcy, you can only keep property exempt from your debt schedule. Bankruptcy laws consider some property exempt so debtors can get to work, live in a home, and have a few other of life’s essentials.

The trustee will arrange to sell all nonexempt property and apply the proceeds toward any unsecured debt. Unsecured debt means it’s not backed by collateral, such as credit card debt.

Some state laws exempt motor vehicles from bankruptcy, but only up to a certain amount. If your car’s value exceeds the exemption amount, you may have to sell it or make payment arrangements with the creditor. There are other ways to retain nonexempt assets. A bankruptcy lawyer can help you determine the best course of action.

Requirements for Keeping Your Car

The requirements for keeping your car vary from state to state. Motor vehicle exemptions allow you to keep your car as long as the current value is less than the exempted amount.

For example, the vehicle exemption in Nevada is $15,000. You can keep a car with an equity value of up to $15,000. The equity value is the fair market value of your vehicle minus the amount you still owe on the car.

While the exemption amount in Nevada is $15,000, it is much lower in other states. Wisconsin law, for example, only offers an exemption of $4,000.

You can also take advantage of federal exemptions. A bankruptcy lawyer will explain which exemption is best for your situation.

Will Bankruptcy Trustees Sell Your Car in Chapter 7 Bankruptcy?

If the equity in your car is more than your state’s exemption amount, the bankruptcy trustee may sell your vehicle to help pay your debts. The trustee will credit you the difference if the car sells for less than the exempted amount before using the remaining proceeds to pay off your creditors.

If the trustee sells your vehicle, you’ll have to decide what to do about buying a vehicle post-bankruptcy. Your options may include:

• Wait to buy a car in the future
• Purchase a lower-priced car
• Take out a loan for a lower-priced car

Trying to finance a new or used car after a bankruptcy discharge often means paying a much higher interest rate. Once the lender sees the bankruptcy on your credit report, they will require either a sizeable down payment or an inflated interest rate. You can refinance your vehicle in a year or two after you’ve made consecutive on-time payments and begun to rebuilt your credit rating.

Can Your Bankruptcy Attorney Stop the Trustee from Selling Your Car?

Many bankruptcy filers have already lost their vehicle to repossession before they file a bankruptcy petition. Whether they were unable to pay on time or their loan balance was too high to sell the vehicle, the lending company reached a point of no return and seized the vehicle.

If you still have your car when you file for Chapter 7 bankruptcy, it’s likely you’ll want to keep it if possible. In addition to the equity in your car or SUV, you may need it to get to work or for getting the kids to school.

If this is the case, you should talk to your bankruptcy attorney about your options, which include:

• Using a wildcard exemption
• Offering other nonexempt property to cover debt
• Paying the trustee the amount of nonexempt equity in your vehicle

Utilizing an exemption often depends on your vehicle’s fair market value. It’s much easier to keep a car worth $10,000 than a car worth $85,000. Since a car loan is a secured debt, the auto finance company will have a say in whether you keep your vehicle.

If the bank doesn’t believe you will make your loan payments post-bankruptcy, it will challenge the trustee’s decision to let you reaffirm your car loan. It may also allow you to add a cosigner to the debt, but there is no guarantee this will happen.

Wildcard Exemptions

A wildcard exemption is what the name suggests it is. It allows you to exempt any asset up to a certain amount. Some states do not allow debtors to apply a wildcard exemption to nonexempt property.

If you live in a state that allows you to apply the wildcard exemption amount to the property of your choice, you can apply it to your car loan. Another option is to combine the wildcard exemption with your state’s motor vehicle exemption.

If your car has a $10,000 nonexempt value and your state allows $5,000 in wildcard exemptions, you can use the $5,000 wildcard exemption and pay the remaining $5,000 to keep the vehicle. As with all aspects of your bankruptcy, it will need to be approved by the trustee.

Using Other Exemptions to Keep Your Car

In addition to the wildcard exemption, some states allow you to carry over a balance from other bankruptcy exemptions. If you don’t use all of your homestead exemption, you can apply the remaining amount to your car.

Some states limit wildcard exemptions to personal property or not allow it to transfer to your car. Both your trustee and your bankruptcy attorney will be familiar with the laws in your state.

Disclaimer: Bankruptcy and banking laws change frequently due to new legislation, higher court rulings, and other means. While FindLaw strives to provide readers with the most current information, we recommend you consult a local bankruptcy lawyer to confirm the current laws.

Feeling Stuck? Talk to an Attorney About Your Bankruptcy Filing

A bankruptcy attorney is the best person to review your property, concerns, and applicable bankruptcy exemptions. They can help you:

• Understand the value of your car
• Learn the real estate or wildcard exemption laws in your state
• Understand the Bankruptcy Code
• Decide between Chapter 13 bankruptcy or Chapter 7
• Develop repayment plans based on your monthly income, payments, and car equity.

If you’re considering bankruptcy, contact a local bankruptcy lawyer to discuss your case and achieve the best possible outcome.

Related FindLaw Resources

• Buying a House After Bankruptcy
• Surviving the Emotional Effects of Bankruptcy
• Exempt vs. Non-Exempt Property Under Chapter 7
• Chapter 7 and Chapter 13 Bankruptcy