Even if you file for bankruptcy under Chapter 7, you may be able to keep your car by using a motor vehicle exemption. The exemption protects at least some of the equity in your car. However, if you have fallen behind on payments under your car loan, you may be at risk of having your car repossessed by the lender regardless. This is a process separate from bankruptcy.
Each state provides its own motor vehicle exemption, and the amount will vary. You will need to compare the amount of the exemption to the equity in the car. First, you will need to determine its fair market value, which is not the price for which you bought it but a reasonable current sale price, based on the car’s age and condition. The bankruptcy trustee may ask you to prove your vehicle’s value by referring to an industry website. If you have paid off any car loan, the fair market value of the car is the same as its equity. If you are still making payments on a car loan, the equity in the car consists of what would remain if you sold the car and paid off the loan. (In some cases, a debtor may have no equity or negative equity, which means that the loan is worth more than the car.)
The situation is straightforward if the motor vehicle exemption covers all of the equity in your car. You can use it to cover the car and keep the car during the bankruptcy. On the other hand, if you have equity left over after applying the amount of the exemption, this is a non-exempt asset that must be surrendered to the trustee under Chapter 7. They will sell your car, pay off any loan that may be attached to it, and reimburse you for the amount of the exemption. Any remaining proceeds from the sale will be used to pay your non-priority unsecured debts.
In some cases, especially when a debtor has a substantial car loan, the trustee may not find it worthwhile to sell the car. There may be minimal funds left to pay creditors after the sale, once the costs of the sale, the trustee’s commission, the loan balance, and the motor vehicle exemption have been covered.
Debtors who want to keep a certain vehicle may be able to negotiate with the trustee to buy the vehicle from the bankruptcy estate. They likely would need to pay less than the amount that would be distributed to creditors following a sale, since the trustee would not need to account for the costs of the sale.
You do not need to worry about losing your car as part of filing under Chapter 13, since you will keep your property while paying your debts under a repayment plan. However, any equity in your car that is not covered by the exemption will be calculated as part of the debt that you need to repay and included in your monthly payments.
Many states have wildcard exemptions that protect a certain amount of value in any type of property. You may be able to protect your car entirely by stacking the wildcard exemption on the specific motor vehicle exemption. Similarly, if you do not need the full value of the homestead exemption to protect your primary residence, you may be able to apply the remainder to other property, such as your car.
If you have not yet paid back your car loan, and if you have missed payments, you may lose the car to the lender regardless of whether the motor vehicle exemption covers it. To prevent repossession, you may be able to redeem the vehicle by paying its fair market value to the lender. However, this is rarely feasible for someone who is filing under Chapter 7. Another option is to negotiate a reaffirmation agreement with your lender, which involves creating a new loan that will continue past the bankruptcy and provide for catching up with any overdue payments. This possibility will depend on the lender’s willingness to negotiate with you.
