Keeping Your Car After Filing Bankruptcy

Keeping their car is one of the top concerns of people who file for bankruptcy – even more than keeping a house, one study revealed. For most people in financial straits, access to a car is a lifeline.

The good news: The system is set up to allow people to keep their car after filing bankruptcy. Some even file bankruptcy to keep their car.

A 2019 Consumer Bankruptcy Project report found that many people will default on their mortgage before they’ll risk losing their car. Bankruptcy law has exemptions that allow them to keep their car. People who file for Chapter 7 bankruptcy, the most popular for individuals, don’t have many assets and keep most of what they own, including their car.

“Based on our research, some of the people who file bankruptcy do so with the main goal of keeping their car,” said Pamela Foohey, a law professor at Benjamin N. Cardozo School of Law and an author of the CBP study. “Bankruptcy includes ways for them to keep their car while discharging other debt. It makes filing bankruptcy potentially productive,” she said.

Those filing Chapter 7 can “reaffirm” their loan or buy the car outright. Chapter 13 allows people to continue to pay their car loan, and other debt under a structured plan. Both, though, have a lot of steps for those who want to keep their car.

Filing Bankruptcy When You Own the Car

A car loan is a secured debt, which means the car is collateral that can be taken back by the lender if you don’t pay. When you file for Chapter 7 bankruptcy, you must list your assets on a form called Schedule A/B. Your car is an asset, because it has value. You must also file a statement of intention (Form 108) that that tells the court whether you plan to reaffirm your car loan, redeem the car or surrender it. If the statement of intention isn’t filed within 30 days of when the bankruptcy is filed, the car loan is no longer part of the bankruptcy proceeding.

The first step to keeping your car if you’re considering bankruptcy, is to determine its status. You’re either paying a loan, leasing or you own it free and clear. The status determines what you have to do to keep your car.

If you’re making monthly payments on a car, it’s either a loan or a lease. If you’re not sure which, check your agreement. If it’s a lease, you are renting the car and there are mileage limits that add costs when the lease ends and you return the car to the dealer.

If you are making monthly payments on a loan, the lender holds the title as collateral. Once you’ve paid for the car, you get the title and own it free and clear. If you can’t make payments, the lender takes back the car back, which is repossession.

Being up to date on your car payments before you file for bankruptcy makes it much more likely you’ll keep your car when you file for either Chapter 7 or Chapter 13.

If you own the car “free and clear,” it means you’ve finished paying the loan. But you still have to account for it in a bankruptcy filing. How much the car is worth will be crucial to your bankruptcy.

How Much Is Your Car Worth?

The value of your car is part of what determines whether you can keep it when filing Chapter 7 bankruptcy. It also helps determine your payment plan in Chapter 13. “Value” is not what the car was listed for when you bought it, or how much you’ve paid since. States have rules on how to determine a car’s value. Most go by “retail replacement value,” though some states have other measures. Retail replacement value is often called ACV (actual cash value). It’s determined by the year and make of the car, its mileage and its condition. Sources like Kelley Blue Book or Edmunds, which list values for cars, can be a good starting point.

Bankruptcy Exemptions

The bankruptcy court allows those filing Chapter 7 bankruptcy a certain amount of money, called an exemption, for a car (as well as a house and other belongings). The federal exemption is $4,000 and it’s  updated every three years. But 31 states have their own exemptions that those filing bankruptcy have to go by. Some are lower than the federal exemption and some are higher. If a car’s value is less than the exemption, you can keep it under Chapter 7 bankruptcy. If it is higher, the bankruptcy trustee may decide to sell the car to help pay your unsecured debt. You would keep the amount of the exemption, with the rest going towards debt.

As an example, let’s say your state exemption is $7,000, and your car is worth $6,000. You can keep your car, because the exemption is higher.

But, if your car is worth $8,000, the bankruptcy trustee might sell it and you get $6,000 for another car, and what was left of the $1,000 balance, after fees, would go toward unsecured debt.

To boost the exemption amount, you can also use the wildcard exemption, an extra exemption that those filing bankruptcy can use for things not covered by specific exemptions. The federal wildcard exemption is $12,575. Often the wildcard is enough that when it’s added to the car exemption, it can cover the value of a car that wouldn’t otherwise be exempt. The CBP study found that people who file for Chapter 7 bankruptcy usually owe money on older cars that don’t have a lot of value.

When filing for bankruptcy, you list property that is legally exempt on Schedule C. Schedule C is the list of legally exempt property that you can keep under Chapter 7 bankruptcy. The property may also be listed in A/B, under assets. Be sure it’s described the same way and it’s clear it’s the same property

If this process sounds complicated, it’s because it is. You may want to consult a bankruptcy attorney to help you sort out the ins and outs of exemptions and keeping your car, as well as dealing with the rest of the bankruptcy filing.

Filing Bankruptcy When You Don’t Own the Car

If you are still making payments on your car loan when you file for bankruptcy, then the equity you have in the car becomes important. Equity is what you still owe on the car subtracted from its current value.  For instance, say your car’s value is $9,000 and you still owe $4,000, that means you have $5,000 equity – if you sold the car, you’d make $5,000.  The exemption in your state is $6,000. Since your equity is less than the state’s exemption, you keep the car. If it’s more, the bankruptcy trustee can sell it, putting the equity toward your unsecured debt and allowing you to buy a $6,000 car.

The longer you’ve owned the car and the more you’ve paid, the more likely it will be over the exemption limit. On the other hand, cars are not like fine wine — they lose their value fast. The longer you’ve had it, the less its worth.

Redeeming the Car’s Current Replacement Value

There is a way to keep your car when you file for Chapter 7 bankruptcy even if it’s worth more than the exemption limit. You can pay the difference the remaining current replacement value to the lender, and own the car outright. This is called “redeeming.” Most people filing for bankruptcy, though, don’t have the bundle of cash needed to do that. Fewer than 2% go this route.

Making a Reaffirmation Agreement to Keep Your Car

Another way to keep your car when filing for bankruptcy is to reaffirm the debt, which means agreeing to a new payment plan with the lender. About two-thirds of those filing Chapter 7 bankruptcy indicate on Form 108, the statement of intent, that they plan to go with this option.

Reaffirming the debt protects the lender, who wants assurance you’ll continue to make payments on the vehicle loan. One of  the consequences of bankruptcy is that creditors, and the bankruptcy court, want to make sure that you’ll be able to pay obligations going forward and they are strict about it. Lenders that agree to a reaffirmation plan will send an agreement to your bankruptcy attorney, who must approve the plan. If you are working without an attorney, the reaffirmation plan has to be included with the documents when you file for bankruptcy. the bankruptcy court will hold a reaffirmation hearing to determine if you can afford to make the car payments.

If reaffirmation is approved, you must keep up with the payments in order to keep the car. You can’t refile for another Chapter 7 bankruptcy for eight years after discharge of one, so that option is gone as far as keeping the car after bankruptcy if you can’t make payments.

Surrendering Your Car

One of the options when filing the statement of intent is to surrender your car. Most people who file for bankruptcy don’t want to do this. This generally happens when the person filing is way behind on payments. If this happens, the lender gets the car back. It’s different from repossession in that not only are you no longer liable for what you owe, but you’re also not liable for the “deficiency balance.” This is the amount that may exist if the lender resells the car for less than what you still owed on it. You have to pay that if you voluntarily surrender the car outside of a bankruptcy.

A bankruptcy’s “automatic stay,” by the way, will halt repossession proceedings if they’ve started before you filed. As long as you file your paperwork on time and pay your bankruptcy fees, you may be able to reaffirm or redeem the car, even if it’s been repossessed, as long as the lender hasn’t already sold it.

Keeping the Car Outside of Bankruptcy

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act eliminated “drive through” car loan agreements for bankruptcies. Before the act, consumers and car lenders could continue with whatever agreement they wanted, ignoring the bankruptcy. While drive-throughs are now against bankruptcy rules, it still happens and courts rarely enforce it. When no intention to reaffirm, redeem or surrender the car is filed by the deadline, a car loan is dropped from the bankruptcy. In many cases, the car owner and lender continue to do business and always, and courts rarely enforce it. Of course, this only works for the car owner if they’re making payments on time.

Since this option is counter to bankruptcy law, it’s not necessarily something you’d want to pursue, and it provides a lot less protection than going with one of the routes allowed by law.

Keeping Your Car, Chapter 7 vs. Chapter 13

People who file for bankruptcy generally have cars that are of less value than the average consumer, but they also have more of their wealth tied up in their car. The CBP car bankruptcy study points out that makes sense. “People come to bankruptcy court with their wealth depleted, and the data bear out the intuition that people will hold onto their means of transportation if they can,” the study says.

The numbers also show that Chapter 13 bankruptcy is a better bet for keeping a car than Chapter 7.

Chapter 7 bankruptcy involves liquidating assets to pay off unsecured debt, and even with the car exemption, it takes a lot of number crunching to keep your car.

Chapter 13 bankruptcy,  on the other hand, creates a repayment plan that takes into account your income and assets, with an eye toward keeping what you own. Unsecured debt is discharged if the plan is successfully completed. It’s an especially good option if you have a lot of equity in a car, though that equity will be considered part of the wealth that is the foundation of your payment plan. If you’re behind on payments, the plan will include catching up.

The aftermath of a Chapter 7 bankruptcy also makes it hard to keep or get a car. If you fall behind on payments, you can’t file again for eight years, so the option of filing bankruptcy to keep your car is gone.  The choices are either make the payments on time or lose the car. A Chapter 7 bankruptcy stays on your credit report for 10 years and comes with a huge hit to your credit score until you can rebuild credit, which makes it hard to get another car loan.

With Chapter 13 bankruptcy, if you own your car free and clear, you keep it. The exemption rules that allow you to keep your car with a Chapter 7 bankruptcy are used differently. Assets aren’t liquidated, but they are what your ability to pay is based on. According to law, creditors can’t get less for a debt in Chapter 13 than they would in Chapter 7, so the car’s value is determined the same way.

The bankruptcy court can get the lender to offer a lower interest rate on a vehicle loan under Chapter 13 rules, which means lower monthly payments. If you’ve owned the car for more than 910 days, about two and a half years, the court can rule that the balance owed is based on what the car is now worth, as opposed to the balance of your original loan. The car loan lender has to agree to the terms the court sets for repayment.

It may be worthwhile to hire a bankruptcy attorney to help navigate the complicated ins and outs and figure out which chapter will work best for you. Foohey said, too, that while filing bankruptcy can be productive for people who want to keep their car, it also can be expensive and if the sole intention is to keep a car, talking to a bankruptcy attorney other options is also productive.

“On average, a Chapter 7 case will cost over $1,500 and a Chapter 13 case, on average, will cost about $3,300,” she said. “If someone is struggling with their auto loan, and is looking to bankruptcy to deal with that auto loan and only the auto loan, filing bankruptcy may not be the best option. It may cost less to turn over the car and pay any deficiency on the accompanying car loan, and then start over with a new car and a new auto loan.”