How to Declare Bankruptcy and Keep Your Car

When you need to file for bankruptcy, it can be a stressful time. As you struggle to find the right solution, there are many things that can make this process even more complicated than it needs to be.  We’ve all heard horror stories about people losing everything during bankruptcy but this is not entirely true. The good news is that there are certain laws that could protect some of your assets- including your car!

Filing for bankruptcy doesn’t have to mean your car will end up on the back of a tow truck. However, it’s important to know what happens to your vehicle after filing for bankruptcy because there are different rules depending on your situation. In this guide, we will show you step by step what you need to do to determine whether you can keep your car.

Can I Keep My Car if I File for Chapter 7 or Chapter 13 Bankruptcy?

Buying a car is not always as easy as driving to a dealership and applying for a car loan. If you are in a tight financial situation and have just declared bankruptcy, there’s a good chance you won’t even get approved for a loan. To get a new car, you’d have to settle for a car loan that has very high-interest rates. Instead of helping you take charge of your financial life, doing this could put you back in debt.

That’s why many people prefer to keep their car even after they file for bankruptcy. If you keep your car after declaring bankruptcy, it is much easier for your daily life and could help with the recovery process faster.

But can you keep your vehicle if you file bankruptcy? The answer is YES it is possible to keep your car in bankruptcy. It depends on what type of bankruptcy you are filing for and if you already own the car or not.

In a Chapter 13 bankruptcy, you go into a repayment plan for your debts so you can keep your assets as long as you keep paying what was agreed. Whether you own the car already or you have a car loan, it’s possible to keep your car in a Chapter 13 bankruptcy.

Most people, however, file for a Chapter 7 bankruptcy. A Chapter 7 bankruptcy erases all of your debts but there’s a catch. If you have any assets, these assets will be taken away and sold to pay for your debts. This means that if you own a car or a house, the government can seize these assets to pay for the money you owe.

So what if you want to keep your car in a Chapter 7 bankruptcy? Is this possible? The answer is also YES. It is possible to keep your car when filing for Chapter 7 bankruptcy if you meet certain exemption laws or if the bankruptcy trustee decides that you can keep your car. Read on to find out whether you may be able to keep your car in a Chapter 7 bankruptcy.

What To Do if I Want to Keep My Car in a Chapter 7 Bankruptcy?

When you file for Chapter 7 bankruptcy, the government will decide if they want to take your car or not. The decision is based on different factors. If you want to know whether it’s possible to keep your car, follow our step by step guide.

Step 1: Check How Much Your Car is Currently Worth

The first step is to check how much your car is worth at present. This is referred to as the car’s fair market value which is determined based on your car’s age and condition. Take note that this is not the price of the car when you bought it or how much your car loan was. This amount is the resale price of your car if you sold it today.

For example, if you bought a car priced at $20,000 three years ago. When you sell the car today, the resale price will be different. Generally, new vehicles lose 20% of their value in the first year and around 15% to 20% every succeeding year. The exact fair market value of the car will be affected by the car’s brand, model, condition, mileage, etc.

If you want to check the fair market value of your car, you can use car depreciation calculators online or check the website of the National Auto Dealers Association for reference.

Step 2: Calculate Your Car’s Equity

After knowing how much your car’s fair market value is, the second step is to calculate how much your equity is. In simple terms, your equity in your car represents the portion of the car that belongs to you. The way to determine your equity is to subtract how much you owe the lender from the current fair market value of the car.

For example, the current value of your car is $5,000. If you own the car outright and do not have any remaining car loan payments, then you have 100% equity in your car. Your equity is equal to the fair market value which is $5,000.

If you have an ongoing car loan and you still owe the lender a total of $2,000, then you have to subtract that from the current value of $5,000. That leaves you with an equity of $3,000.

You can also end up with “zero equity” which happens if your debt is equal to the value of the car. Using the same example, if your car is now worth $5,000 and you still owe $5,000 to the lender, then you have no equity.

It is also possible that your debt is higher than how much your car is currently worth. Let’s say you still owe the lender $7,000 but after checking your car’s current value, it is only worth $5,000 in the market. This is called negative equity because you are short $2,000.

Step 3: Confirm Your State’s Motor Vehicle Exemption Laws

Now that you know how much your equity is, the next step is to check whether your state has laws on Motor Vehicle Exemptions in bankruptcy. State and federal exemptions will be able to protect some or all of the equity that you have on your car.

Depending on the state where you reside, the amount of equity that can be exempted from your vehicle will vary. Some states, however, will allow you to use the bankruptcy exemptions set by the federal government.

The federal exemption on motor vehicles is currently set at $4,000. Some states have a lower exempt value, while other states are more generous. Texas, for instance, will allow you to exempt the entire value of one vehicle per licensed household member.

Step 4: Calculate How Much You Can Exempt Based on Your State’s Motor Vehicle Exemption

The last step is to compare your equity relative to what your state allows you to exempt. This will generate different possible outcomes.  The outcome of your calculations will determine whether you could keep your car or not.

The next section will discuss different scenarios after making your calculations.

Possible Outcomes and Ways To Keep Your Car In A Chapter 7 Bankruptcy

Once you calculate your car’s Fair Market value (FMV), determine your equity, and learn what your state’s Motor Vehicle Exemption (MVE) is, you could end up in one of the below scenarios. This will affect whether you can keep your car or if you need to take further actions to secure ownership of your vehicle.

1. You own your car and your equity is lower than your state’s Motor Vehicle Exemption.

In this scenario, you can keep your car as long as the value of the car (which is equal to your equity) is below the state exemption. Let’s say you have 100% equity and the FMV of your car is $3,000. If the MVE in your state is $4,000, then you can keep your car.

2. You own your car and your equity is higher than your state’s Motor Vehicle Exemption.

The answer to whether you can keep your car will depend on how much higher your equity  is compared to the MVE. Here are 3 sample scenarios that could happen

A. You have 100% equity and the FMV of your car is $15,000. If the MVE in your state is $4,000, then the remaining $11,000 is not protected. If this is the case, the bankruptcy trustee will most likely sell your car and pay you $4,000 back. The trustee will use $11,000 to pay your other debts and pay the cost of selling the car.

B. You have 100% equity and the FMV of your car is $5,500. If the MVE in your state is $4,000, then there’s $1,500 not protected. In this case, your options include:

  • Use the wildcard exemption if your state has one where you’re allowed to apply a certain amount to any property of your choosing. You can add this amount to your MVE so you can keep your car.
  • Ask the bankruptcy trustee if you can be allowed to pay the remaining $1,500 so you can keep your car. The trustee may allow this if it is not such a huge amount of money to avoid the hassle and work involved in selling your car.

C. You have 100% equity and the FMV of your car is $4,500. If the MVE in your state is $4,000, that only leaves $500. This $500 may not be enough to cover the cost of selling the car, pay the trustee, and pay your other creditors. In this case, the trustee may choose to ask you to pay for the $500 so you can keep the car or allow you to keep the car without payment.

3. You have a car loan and your equity is lower than your state’s Motor Vehicle Exemption.

Let’s say your car’s FMV is $10,000 and you still owe the lender $7,000. That gives you equity of $3,000. If your state’s MVE is $4,000 then you can keep the car by reaffirming your car loan.

Reaffirming your loan means agreeing with the creditor that you’ll keep making the car payments even after the bankruptcy discharge. You will, however, have to prove to the court that you can afford to make payments.

4. You have a car loan and your equity is higher than your state’s Motor Vehicle Exemption.

In this situation, the decision will depend on how much higher your equity is. If your equity is much higher than what is exempted, the trustee may decide to sell your car. But if it is not that high, then you might be allowed to pay for the remaining amount.

A. Your car’s FMV is $20,000 and you still owe the lender $5,000. That gives you equity of $15,000. However, your state’s MVE is only $4,000. That leaves $11,000 not protected by the MVE. The trustee will likely sell the car to pay your other debts and give you back the $4,000. If you live in states where the entire value of the exempt vehicle is protected (such as Texas), you can keep the car.

B. Your car’s FMV is $10,000 and you still owe the lender $7,000. That gives you equity of $3,000. However, your state’s MVE is only $2,000. That leaves $1,000 not protected by the MVE. You could ask the trustee if you can pay the $1,000 so you can keep the car and continue paying the monthly payments.

5. You have a car loan and your debt is higher than the value of the car.

Let’s say your car’s FMV is $2,000 but you still owe the lender $5,000. In this scenario, you owe more than what your car is worth in the market. When you have negative equity, one option that you can take to keep your car is to redeem the car.

Redeeming a car means agreeing with the lender to pay a lump sum amount of what the car is currently worth and erasing the rest of your debt. So using the example above, you can redeem the car by paying the lender a one-time payment of $2,000 to get absolute ownership of the car.

Keeping Your Car When You File for Bankruptcy

Keeping your car in bankruptcy is possible. By following the steps we outlined in the article, you can determine whether you have enough equity to keep your car depending on the bankruptcy exemptions in your state.

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