We hear the question all the time: Can I keep my car if I file bankruptcy? There is a fair amount on the web on this topic: It basically comes down to the value of the car, any liens, exemptions, and type of bankruptcy you file.
The Basic Answer
Yes, you can usually keep your car in bankruptcy. However, I should point out that not everyone wants to keep their car, and you also have the option of surrendering your car in bankruptcy and discharging any balance owed–but this page is more for people wondering if they can keep their car.
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 usually plan to pay their car loan, but they want to know if the bankruptcy trustee will take their car despite that. In other words, 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.
In Chapter 13, the answer is simple: The bankruptcy trustee never takes a car. That is because Chapter 13 is not a liquidation chapter of bankruptcy in which things are taken. However, in Chapter 7, which is the liquidation chapter of bankruptcy, you must use “exemptions” to protect property you want to keep. You will not lose a car if you want to keep it, pay any associated car loan, keep it insured, unless you are over the exemption limits.
So, what about exemptions? In Massachusetts, unlike some other states, one can choose between the state and federal bankruptcy exemptions. Under the Massachusetts exemptions, which can viewed in full here, the car exemption is $7,500. For a “handicapped person or a person 60 years of age” the exemption doubles to $15,000. The exemption amount protects “equity.” To determine equity, you must subtract any car loan balance from the value of the wholesale resale value of the car.
Under the federal exemptions, the car exemption is $3,450 plus an unused “wildcard” exemption–up to $11,975 (a total of $15,425). How much “wildcard” you’ll use before you get to exempting a 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 much if any. The bottom line is that under either exemption
schedule, you can exempt quite a bit of car value.
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.