Keeping Your Car When Filing for Bankruptcy: What You Need to Know

Keeping Your Car When Filing for Bankruptcy: What You Need to Know

Filing for bankruptcy can provide a fresh start for individuals overwhelmed by debt, but it also raises concerns about what assets you can keep through the process. For many, their car is crucial for getting to work, school, or other essential commitments, making the possibility of losing it during bankruptcy proceedings particularly distressing. Understanding your rights and options can help you navigate bankruptcy while retaining your vehicle.

Exemptions and How They Work

Most states have specific bankruptcy exemptions that allow you to keep certain personal property up to a specific value, including your car. These exemptions can vary widely from state to state, so it’s essential to consult the bankruptcy laws in your jurisdiction or discuss with a bankruptcy attorney to understand the exemptions available to you. If the equity in your car—the value of your car minus any loans secured by the car—is less than the exemption limit, you’ll likely be able to keep your car.

Chapter 7 vs. Chapter 13 Bankruptcy

The type of bankruptcy you file can also affect your ability to keep your car:

• Chapter 7 Bankruptcy: Also known as a liquidation bankruptcy, this option can discharge most of your unsecured debts. However, if your car equity exceeds the allowable exemption, the bankruptcy trustee might sell your car to pay your creditors. In some cases, you might be able to negotiate with the trustee to pay the difference or work out another arrangement to keep your car.
• Chapter 13 Bankruptcy: This is a reorganization bankruptcy that involves creating a repayment plan to pay back all or a portion of your debts over three to five years. If you’re behind on car payments, Chapter 13 can stop repossession and allow you to catch up over time. Since you’re repaying debts, you generally get to keep your assets, including your car, as long as your repayment plan is approved and you adhere to it.

Reaffirmation Agreements

In a Chapter 7 bankruptcy, you may have the option to sign a reaffirmation agreement with your car loan lender. This is a legal agreement that excludes your car loan from the bankruptcy discharge, meaning you’re legally obligated to continue making payments in exchange for keeping your car. Before signing a reaffirmation agreement, consider whether you can afford the payments; failing to make them could result in repossession after bankruptcy.

Considerations Before Deciding

Before deciding to keep your car through bankruptcy, assess whether it’s the best financial decision. If your car payment is high, the loan interest rate is unfavorable, or if the car is worth significantly less than what you owe, surrendering it might be a better option. Remember, bankruptcy offers a chance to relieve financial burdens, so it’s crucial to think critically about what assets are worth retaining.

Conclusion

Filing for bankruptcy doesn’t automatically mean you will lose your car. By understanding the exemptions, the differences between Chapter 7 and Chapter 13, and the role of reaffirmation agreements, you can make more informed decisions about your vehicle. Consult with a bankruptcy attorney to explore your options and strategize the best path forward for keeping your car and achieving financial relief.