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Can You Keep your Car when You File Bankruptcy?


We hear the question all the time: Can I keep my car if I file bankruptcy? We hear it so often that I'm making a separate page devoted to the question.  People are sometimes very nervous about their cars when considering bankruptcy; this page will make the entire matter very clear

The Basic Answer

Yes, you can usually keep your car in bankruptcy.  You also have the option, I should note, of surrendering your car in bankruptcy and discharging any balance owed--but this page isn't about that.

The Details

There are two parties that might have a right to your car besides you: the bankruptcy trustee and your car lender. This is an important distinction.  If you have a car loan, you must pay it in order to keep your car, even in bankruptcy, except in some limited circumstances (see below for those).  However, when people ask whether they will lose their car in bankruptcy, they normally mean will they lose it to the bankruptcy trustee.  They want to know if filing bankruptcy itself will result in the loss of their car, even if they plan on keeping their car loan up-to-date. 

The answer is that you never lose your car in Chapter 13 if you don't want to and you keep your car loan current because as I explain elsewhere, Chapter 13 is not a liquidating chapter. In Chapter 7, which is a liquidation chapter, you will not lose your car unless it is over the exemption limits.  We have a choice here in Massachusetts between the state and federal exemptions.  Under the Massachusetts exemptions, the car equity value that can be exempted is $7,500.  Under the federal exemptions, it is $3,450 plus an unused "wildcard" exemption--up to $11,975 (total of $15,425).  How much "wildcard" you'll use before you get to exempting you car depends on your other property, but people with normal household goods and, say, a 401(k) and no real estate equity will not use any. The bottom line is that under either exemption schedule, you can exempt quite a bit of car equity. 

What if you are above the exemption limits and still want to keep your car?

In this scenario, you must either file Chapter 13 or you must bargain with a Chapter 7 trustee to buy back your non-exempt car equity.  Of course, we have experience with all of these circumstances, but this is pretty unusual--most people are under the exemption limits and won't lose their car, even in Chapter 7. 

What were those "limited circumstances" you mentioned above about not paying a car loan and keeping a car?

If you are underwater on your car loan and file a Chapter 13 case, you can cramdown the car loan and pay it in your plan.  What this means is that you would make a payment for the car directly to the Chapter 13 trustee and the creditor's claim would be bifurcated into secured and unsecured portions, with the secured portion being the value of the car and the overage being deemed unsecured.  This can be very useful to free up money that otherwise needs to be paid to mortgage, tax, or even general unsecured creditors (due to the means test) to accomplish your goals.

There is an important exception to this, however.  If you bought and financed the car within 910 days of the bankruptcy, you cannot cram it down.  Under those circumstances, in order to keep the car, you must make your regular car loan payment to your car lender if you want to keep the car.

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Ortiz & O'Donnell
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Phone: 6177160282