How To File for Bankruptcy and Keep Your Car

Cars take us to work, school, stores, and so many other important places. But if you’re considering bankruptcy, you might be worried about losing your car during the bankruptcy process.

Bankruptcy law allows cars to be taken and sold under certain circumstances. But bankruptcy rules also include options that make it possible for most people to keep their cars. This article explains a few of these options. After you read this article, follow up with a qualified bankruptcy attorney to get legal advice tailored to your situation.

How the Type of Bankruptcy Affects Your Ability to Keep Your Car

The federal bankruptcy code provides two primary options for people seeking debt relief: Chapter 7 and Chapter 13. In either bankruptcy filing, the bankruptcy trustee (the person overseeing your bankruptcy case) must ensure that creditors get a reasonable amount of their money back.

Chapter 7 bankruptcies repay creditors by selling off your property. Chapter 13 bankruptcies focus on repaying creditors over time. You’ll have three to five years to pay off your debts.

The type of bankruptcy you choose can affect your ability to keep your car after bankruptcy. Though every bankruptcy case is different, generally, Chapter 13 makes it easier to keep a vehicle. Because Chapter 7 bankruptcies depend on selling property, there’s a risk that your car could be sold to pay creditors under certain circumstances.

Does Your Car Qualify for Bankruptcy Exemptions?

Not all property can be sold during a Chapter 7 bankruptcy. Bankruptcy exemptions list property that filers can protect during bankruptcy. The trustee cannot sell exempt property. Depending on your state’s bankruptcy laws, you will either have to use your state’s exemptions or choose between the federal exemptions and those offered by your state.

Fortunately, both the federal bankruptcy code and most state bankruptcy laws contain motor vehicle exemptions. Your ability to use these exemptions during bankruptcy proceedings depends on how much equity you have in your vehicle. Equity is the value of your car after all debts are subtracted.

Keeping Your Car in a Chapter 7 Bankruptcy

If you are still paying off a car loan, exemptions can save your car from the trustee’s sale. However, exemptions do not affect the lender’s ownership interest in your car.

This interest, called a lien, lasts until the car is fully paid off or returned. You’ll have to keep making payments to keep the lender from exercising its ownership rights through repossession. Fortunately, once you prove that your car is exempt, the bankruptcy code gives you several options to pay for your car:

Option 1: Redemption

Say you owe $10,000 on your car loan, but the car’s only worth $7,000. Because your car is worth much less than you owe, redemption is a good option. In a redemption, you pay the car’s fair market value in one lump sum. Afterward, you own it free and clear.

Of course, it’s not easy for most of us to come up with thousands of dollars all at once, especially while filing for bankruptcy. However, some companies specialize in redemption loans. You may have to pay a higher interest rate, but you’ll keep your car.

Option 2: Reaffirmation

Like redemption, reaffirmation lets you pay for your car. But instead of making one lump sum payment, reaffirmation lets you pay over time. You’ll need to sign a new loan contract to reaffirm your loan. The bankruptcy court will hold a hearing to ensure you can afford the payments.

Option 3: Paying Without Reaffirmation (aka ‘Ride-Through’)

Many lenders are so grateful to get paid that they will happily keep accepting payments without a reaffirmation agreement. This is known as the “ride-through” option. Officially, the 2005 changes to the federal bankruptcy code eliminated the ride-through option. Unofficially, state laws and lender practices make it a popular choice.

Lenders can’t come after you for a deficiency balance in a ride-through. Because your bankruptcy terminated that contract, you have no obligation to repay the difference. You can simply give the car back to the lender and owe nothing. Ride-through is risky because it doesn’t require lenders to report payments to credit bureaus, making it harder to boost your credit score after bankruptcy.

Option 4: When Exemptions Aren’t Enough

The motor vehicle exemption — alone or combined with other exemptions — normally protects enough equity to help you keep your car. But there are times when it does not. Believe it or not, you might be able to keep your car even in this situation.

The trustee would normally sell the car and use the money to pay off creditors. But there is another option. You can ask the trustee to let you buy the car. You’ll pay for the non-exempt equity, but you will probably get a discount because you’re helping the trustee avoid the cost of a sale.

Keeping Your Car in a Chapter 13 Bankruptcy

Chapter 13 has several tools that help you keep your car. First, Chapter 13 gives you time to catch up if you’re behind on your bills. The missed payments will be added to your repayment plan but will be spread over the entire repayment period.

Second, a Chapter 13 “cram down” can help if you owe more than your car is worth. Like a Chapter 7 redemption, cram down lets you pay the vehicle’s true value. So, if you owe $10,000 on a car worth $5,000, after a cram down, you’ll be responsible for $5,000. You must own your car for at least 910 days (roughly 2.5 years) to use a cram down.

Finally, Chapter 13 can help you get your repossessed car back. You can file a “motion for turnover” that asks the lender to return your car. Some lenders will return your car without a motion once you begin making payments under an approved Chapter 13 payment plan.

A Bankruptcy Attorney Can Help You Keep Your Car

There are many ways to keep your car after you file for bankruptcy. Hopefully, you can find one that works for you. To learn more about the options that fit your unique situation, find a bankruptcy lawyer near you.