The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
The promise of a fresh start can make bankruptcy an appealing option for those in need of debt relief. But it’s worth remembering that bankruptcy does carry a burden: you’ll have to restructure your finances and potentially agree to pay back some of your debts. You might even have to part with important property like your vehicle.
If your car is essential to you — a needed tool for transportation to continue working or to navigate your life — it is worth considering how declaring bankruptcy might affect it.
Your car’s value will affect which bankruptcy type you choose to pursue and may require you to take extra steps to protect your vehicle. Below, we’ll explain how different types of bankruptcy affect your car and how you can keep your car as you navigate your bankruptcy.
What happens to your car in chapter 7 bankruptcy
A chapter 7 bankruptcy is known as liquidation bankruptcy, which typically means you will be required to sell assets and property to pay back your debts. When you file for chapter 7 bankruptcy, you’ll have to list all your assets, including your car.
The good news is that most states offer an exemption for motor vehicles, meaning that you can exempt your car from bankruptcy and maintain ownership over it. However, this is determined through a formula that considers the car’s equity and your loan status.
To figure out how much equity you have in your car, take your loan balance and subtract it from the value of your car. Note that if you’re close to the end of your term, you may not have a lot of equity as vehicles depreciate quickly. After you know how much equity you have, find the motor vehicle exemption in your state. If you have less equity than the exemption limit, you shouldn’t have any issues keeping your car.
What happens to your car in chapter 13 bankruptcy
Chapter 13 bankruptcy is known as a reorganization bankruptcy. Instead of paying back your debts by liquidating your assets, you agree to a repayment plan that will require you to pay back a portion of your debts over three to five years. Chapter 13 bankruptcy does not require you to liquidate your car, and you likely will be able to hold onto it through the proceedings.
What happens to your auto loan if you file for bankruptcy
The lender may repossess your car if you file for chapter 7 and aren’t in good standing with your loan. Because you haven’t kept up with your loan payments, your vehicle won’t be protected by any exemptions.
Depending on your situation, you may be able to keep the car if you repay the rest of the loan in one lump sum or sign a reaffirmation agreement. In a reaffirmation agreement, you agree to pay for the car loan as you would if you hadn’t filed for bankruptcy.
If you sign a reaffirmation agreement and decide you don’t want to keep your car, you can rescind or cancel it. You’ll need to do so within 60 days after you sign the agreement or before the court gets involved with your discharge — whichever option is later. You won’t have to pay for your vehicle if you rescind and return it in time.
When it comes to chapter 13 bankruptcy and your car loan, the amount you owe on it may be reduced, especially if you owe more than it’s worth. In addition, if you’re eligible for a repayment plan and catch up on your loan, you might be able to keep your car.
How to protect your car in bankruptcy
The best way to protect your car regardless of the type of bankruptcy that you choose is to own it outright. This frees you from the additional burden of needing to worry about your loan or lease status.
Regardless of your car’s status, the best way to protect it is through an exemption. A federal exemption currently allows you to keep your car if the value is under $4,450 — a figure that will remain in place until 2025. Some states also offer exemptions — including ones that are more generous and may even offer you the option to combine exemptions.
As long as the value of your car is under the exemption amount, you can claim the exemption and keep your car. You’ll have to keep up payments if you still owe them or risk having your car repossessed by your lender, but it will keep you from being obligated to liquidate the car as an asset to pay down your debt.
There’s a good chance your car is one of your most important possessions. After all, it allows you to run errands, drive to and from work, attend social events and live your everyday life. Before you move forward with Chapter 7 or Chapter 13 bankruptcy, make sure you understand exactly how it will affect your car.
If you determine and confirm that you won’t be able to keep your car for any reason, figure out how you’ll get around. This way you can continue to do what you normally do as you go through bankruptcy.
Bankruptcy may seem like an easy way to get out of debt. The truth is it can damage your credit score and make it difficult for you to qualify for financing in the future. If you decide Chapter 7 or Chapter 13 is right for you, make sure you’re clear on what will happen to your car and auto loan if you have one.