You may be wondering whether you can keep your vehicle when filing bankruptcy. The short answer is “Yes” – in almost every situation it is possible to keep possession of one or more of the vehicles you are currently driving.
Can I keep my car if I file for bankruptcy?
However, making this possibility a reality is slightly more involved. In this article, I’ll seek to help you better understand the methods that are available for keeping possession of your vehicle(s) during bankruptcy. In addition, I hope to help you determine if keeping your vehicle is a wise decision or not. The first question then is “How can I keep one, two or more of my vehicles during Bankruptcy?”. In order to answer that question, you need to figure out 2 basic pieces of information. You also may consider taking a Chapter 13 Repayment Calculator which takes into consideration vehicle equity.
What is the Current Equity of my Vehicle?
If you own your vehicle outright, the equity of your vehicle is simply its current market value. Researching your make and model on websites like Edmunds, or Kelley Blue Book will allow you to quickly come up with an accurate value for your car. If you are making payments toward the ownership of your vehicle, you will need to subtract what you owe on your vehicle from the value of the vehicle to determine your car’s equity.
Am I Current on my Car Payments?
The second question is whether you have been keeping up on your monthly car payments. If you have complete ownership of your vehicle and are making no payments, this question is a moot point. Find out if your lender has access to your vehicle as collateral. Your payment status will come into play when determining how to keep your vehicle during bankruptcy proceedings.
Once you’ve answered these questions we can begin to apply the answers to your specific situation. Let’s first take a look at your car during a Chapter 7 Bankruptcy.
Keeping Your Vehicle in Chapter 7 Bankruptcy
The goal of filing for Chapter 7 Bankruptcy is essentially to surrender your non-exempt property to a trustee who sells it and uses the proceeds to pay off as much of secured debt as possible. In exchange, your applicable unsecured debts are discharged or forgiven. (Secured debt refers to debt linked to a physical asset such as a house mortgage or car loan, while unsecured refers to debt that is not directly linked to any assets such as credit card debt or medical bills.)
Hopefully, going through this process allows you to make a fresh financial start while only paying a percentage of your total debt obligations. As you begin to work your way through a Chapter 7 Bankruptcy, here are 3 different options for hanging on to your vehicle.
1. Use an Exemption to Cover Your Car’s Equity
You are allowed certain bankruptcy exemptions in a Chapter 7 bankruptcy. Your assets may be sold to help repay your debts if your equity exceeds the available exemption. You can choose to enter your car’s equity into one of your applicable exemption categories. You should be able to keep the car from being sold by the trustee if your equity is under the exemption amount.
2. Reaffirm the Loan
You are often able to reaffirm your car loan with approval from the bankruptcy court. If your creditor agrees, then you’ll be able to maintain possession of your vehicle as long as you stay current with your payments. Be aware that by reaffirming a car loan, you are committing to repay the entire balance with interest as well as any late fees/ late payments that may have accrued. You will also be liable for the entire amount due if you default on the loan again.
3. Move to Redeem the Vehicle
Moving to redeem is another way to keep possession of your vehicle in spite of bankruptcy. Redeeming your vehicle is paying the lender for the value of the car instead of what you currently owe on the car. If you owe more than the car is worth, redeeming your vehicle might be a good option for you. You must be able to cover the equity of the car in order to qualify for redemption.
You are in danger of your car being repossessed if you are behind on your car payments. Make sure you speak with a Bankruptcy Attorney to find out how you can protect your car from repossession.
4. Letting go of the Car in Chapter 7 Bankruptcy
If you do not want to keep your car, you will have to surrender your vehicle. You need to make sure that you are no longer liable for any late fees, interest fees, or outstanding balances. Also, if someone cosigned on your vehicle loan, they may be liable for part of the debt.
If you decide to surrender your vehicle, you will need to find a new way of transportation. Opting out of your car payments by surrendering your vehicle may free you up to purchase a less-expensive used car.
Keeping Your Vehicle in Chapter 13 Bankruptcy
You will start a 3 or 5-year process of paying a percentage of your unsecured debt and non-exempt secured debt. This will include the total owed amount of all your secured debt, minus the amount you are allowed to exempt in your payment plan. You’ll also likely pay a small percentage of all your unsecured debts depending on your income level.
The more non-exempt secured equity you possess, the higher your monthly payment will be. You should consider how much you can afford before considering how to deal with your vehicle. Here are 2 ways you can keep your vehicle during a Chapter 13 Bankruptcy.
1. Use an Exemption to Cover your Car’s Equity
During a Chapter 13 bankruptcy, you are given a certain amount of exemptions for your secured debts. If you have enough exemptions to cover the equity, you can keep the car from being repossessed. You will also have the entire 3 or 5 year payment period to finish paying off your obligations.
2. Receive a Car Loan Cramdown
If you meet certain requirements, you can be approved for a car loan cramdown. This is a stipulation that allows you to pay for the current value of your vehicle if it is less than the amount you owe on the vehicle. Once approved, you will have the duration of your repayment plan to fully pay off the car’s value.
The remainder of your car loan would be classified as “unsecured debt” and you would be required to pay a percentage throughout your payment plan. When you finish the bankruptcy proceedings, you will have full ownership of the vehicle.
Important question: How does a Chapter 13 bankruptcy apply to luxury vehicles?
In some states, any secured debt payments are “allowable withholdings” and are to be retained during a chapter 13 bankruptcy. In other states, the decision is left up to the bankruptcy court. If you have payments on a car and want to keep it, you need to prove to the court that :
- Your luxury/sports vehicle is a necessary expenditure
- You are able to make timely car payments while keeping up with the chapter 13 payment plan.
If the court approves your plan, you’ll be able to keep and pay off your vehicle during the 3-5 year payment plan, even if it’s a luxury car.
3. Surrendering your car in a Chapter 13 bankruptcy
If you decide you don’t need to keep your current vehicle, you also have the option of surrendering a vehicle during a Chapter 13 Bankruptcy. This might make the most sense if you don’t have the extra income to cover an expensive car payment in addition to the rest of your Chapter 13 payment plan.
Now that you’re familiar with your options, here are some final recommendations on how to keep your car during bankruptcy. In almost every circumstance, there is the ability for you to keep your vehicle, whether you are going through a Chapter 7 or Chapter 13 bankruptcy. You can usually keep your car if you are willing to work hard enough.
The real question is this: Is keeping my vehicle during bankruptcy in my best interest? Figure out what is most important to you and then make some tough decisions.