Can I Keep My Car if I File for Bankruptcy?

Little signifies the independence of an individual more than owning his or her own vehicle.  Yet under bankruptcy laws, a debtor is not always guaranteed to keep their car, even though it is one of the debts may be discharged under the bankruptcy judgment.  However, there are alternatives for those who wish to retain their car, as long as they have good advice that helps them take the greatest advantage of those options.

Vehicle Exemption

Chapter 7 bankruptcy provides a consumer with the greatest relief from debt because it literally discharges much of the consumer debt that is owed.  However, in order to discharge that debt, a bankruptcy trustee may liquidate any unprotected property to pay off as much of that consumer debt as possible before it is discharged.

Both federal and state laws make provisions for debtors to protect some types of personal property when filing for bankruptcy.  Most states require the debtor to use the state exemptions; however, some states allow the debtor to choose whether they will claim all federal or all state exemptions.  Under federal statutes, a debtor may claim up to $3,225 for a motor vehicle.  State exemptions vary:

• Some states have no specific vehicle exemption
• Other states allow up to several thousand dollars
• Still other states require the debtor to use a portion of a wild card exemption to protect their vehicle

Those exemptions very simply allow a person to protect the designated amount of assets, which they have invested in their vehicle.  If a debtor claims the federal exemption, they may claim up to $3,225 in equity in a motor vehicle.  If that debtor owns a vehicle that is worth $20,000 and they have only $1,000 in equity in the vehicle, it is protected.  However, if that $20,000 vehicle is paid off, only $3,225 is protected.  In that case, the bankruptcy trustee may sell the vehicle and use all but $3,225 to pay creditors.

As a consumer debt, after a portion of that vehicle is claimed as an exemption, the remainder of the debt can be discharged.

Vehicle Liens

While a consumer loan for a vehicle can be discharged under bankruptcy, if the vehicle is security for that loan, the lien holder may still be able to repossess it to cover that debt.  At that point, the debtor has three options:

Reaffirmation

Reaffirm the debt by renegotiating with the lien holder and promising to keep up payments on the new contract.  In return, the lien holder promises not to repossess the vehicle as long as those payments are made regularly and on time.  However, if the debtor fails to make regular and timely payments, the lien holder may then repossess the car and sue the debtor for any remaining balance on the loan.

Redemption

Redeem the vehicle by paying the current market value of the car in one lump-sum payment.  The remaining amount of the loan would then be discharged in the bankruptcy judgment.

Surrender

Surrendering the vehicle can be a wise choice if the debtor owes more than the car is worth at current market prices.  The creditor will claim the vehicle and the remainder of the debt will be discharged in the bankruptcy judgment.

Get Legal Advice

These can be difficult options for a debtor to comprehend and it is essential for most consumers to enlist the help of a skilled bankruptcy attorney to help them make the best choices under their current circumstances.