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How to file for bankruptcy and keep your car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare data for free – so that you can make informed financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are advertised on this website are provided by companies that pay us. This compensation can affect the way and where products appear on this site, including for instance, the order in which they may be listed within the categories of listing and other categories, unless prohibited by law. This applies to our mortgage or home equity products, as well as other home lending products. This compensation, however, does have no impact on the content we publish or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be open to you.


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5 minutes read. Published March 20, 2023

Authored by Mia Taylor Written by Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and

Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to control their finances by providing clear, well-researched information that breaks down complicated topics into digestible chunks.

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If you’re thinking about it the possibility of bankruptcy, there are options to help keep your car from being taken away — even if you haven’t paid off the auto loan. In some states, you might be able to stay away from repossession of your vehicle through bankruptcy code exemptions. However, the laws vary from state to state. Do you have the ability to safeguard your car through bankruptcy?

Both Chapter 7 and Chapter 13 bankruptcy contain provisions that you might be able keep a car that you bought using secured loan.

How to preserve your vehicle through Chapter 7 bankruptcy Car loans are secured by the vehicle, which means that it is pledged as collateral to pay back the loan. Because the vehicle serves to serve as collateral for the loan, it is able to be taken by the lender if you fail to maintain payments on the debt. However, under Chapter 7, the most well-known bankruptcy for people there are a variety of options to hold on to your car. “To keep a vehicle while you go through Chapter 7, the debtor must remain in good standing with their lender, perform a ‘redemption,’ which involves paying back the lender or performing an ‘affirmation’ that may require altering the loan terms, but this requires lender permission,” says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. The following is how reaffirmation and the redemption process are done: Redemption: Obtaining redemption means paying your lender for the car’s current reasonable market value. If you’re able to make this happen it can make your life easier later on because you’ll no longer have to pay for car loans. However, because the majority of bankruptcy filings are made during a time when cash is scarce and available, this might not be an option that is feasible. Reaffirm: This option permits you to continue to pay on your loan as before filing for bankruptcy. When you reaffirm your debt, you agree a second time to continue making payments according to a schedule set by both you and your lender and may also include revised loan terms. Tips from Bankrate

If neither of these options is a good fit for you financially, you can sell your car to the lender and get the debt eliminated.

“When you receive a Chapter 7 Discharge, you will have no more personal obligation to pay the loan,” says Pennsylvania-based bankruptcy attorney Dai Rosenblum. “All the creditor has to do is seize their collateral- your car. They are not able to pursue you for cash.” Bankruptcy exemptions When you file to file for Chapter 7, your assets are liquidated or sold to pay your creditors. The bankruptcy court will allow the holder to retain a specified amount of your property up to a certain monetary value, according to This is referred to as the “exemption.” It is a federal exemption limit. maximum federal exemption is $4,000. However, some states set their own limit that must be followed Certain states’ exemptions exceed more than $4,000 while some are less. Your value for your vehicle in bankruptcy filings is not based on what the price you spent on it. In the majority of states, value is tied to the value of the car’s cash value depending on factors such as the year, model, and mileage. Car industry sources like Kelley Blue Book or Edmunds could also be used to help determine the worth of your car. If your car’s current value is found to be lower than the state’s exemption limits, then you’ll be permitted to keep the vehicle even though you’re filing for bankruptcy. However, if the car is worth more than the exemption limit, bankruptcy trustees may decide to sell the vehicle to help repay your debts. The way it works is If the state’s exemption is $4,000, and your vehicle’s worth is $2,000, then you’ll likely be able to keep the vehicle since it’s value is less than what’s allowed. If, on the other hand the exemption in your state is $4,000 and your car is worth $10,000, a bankruptcy trustee may take the car off the market and use the funds to pay off your debt. Reasons you wouldn’t keep your vehicle during Chapter 7 bankruptcy Keeping your car isn’t always feasible when making a Chapter 7 bankruptcy. In some cases, it does not make financial sense to try and hang on to the vehicle. In deciding these issues, the value of your car as well as your equity in the car play a key role. The equity in your car and bankruptcy are similar as a mortgage on the property equity is calculated by subtracting the remaining amount owe on your car loan from the vehicle’s current market value. “For example, if you own a car that has a fair market value of $10,000 with the $1,000 loan amount, you’ll have equity of $9,000,” says Rosenblum. If the equity is higher than the exemption that a bankruptcy trustee may choose to sell the car and apply the proceeds toward paying off debts. It’s not financially sensible to keep the car. Lastly, it’s also worth bearing in mind that if your vehicle’s current fair market value is on the car loan then keeping the car won’t necessarily be a smart financial decision. “Very often there is a situation where the loan balance is greater than the value of the car and, if there is no way or the desire to keep the car, the person filing bankruptcy lets it go,” says Michael Sullivan, a personal financial consultant working with the non-profit financial counseling agency Take Charge America. How do you keep your car through Chapter 13 bankruptcy Chapter 13 bankruptcy also gives you several options for keeping your car. “The Chapter 7 framework is the foundation for Chapter 13,” says Rosenblum. “But when you enter Chapter 13, you reorganize your debt.” Making a payment plan As part the Chapter 13 debt reorganization, an initial three to five-year repayment plan will be created which takes into account your earnings and assets. The aim for Chapter 13 is to Chapter 13 process is to allow you to keep your possessions, including your car, while paying the debt. Additionally, if you’re behind in your payments, the program will need you to catch up and pay on time moving forward. Revising the terms of your loan The court may also demand that the lender amend the car loan conditions, such as lowering the interest rate, which is another way to aid in keeping the vehicle. With revised terms, the monthly payments will be lower. “A rewrite of the debt owed to the lender could be done by way of the Chapter 13 plan, and market terms may be imposed on a lender,” says Hawkins. Reduce the loan balance The process of altering your auto loan terms as part in Chapter 13 may also include what’s called a “cramdown,” which reduces the amount you have to pay to the lender in proportion to your car’s actual market value. The timing of your purchase of a car is a crucial aspect in the process of cramdown. In particular, there is a 910 rule that applies to Cramdowns. Cars that are newer If you purchased your car within 910 days of bankruptcy, then you are required to pay the full value of the loan, though the rate of interest may be reduced. Older cars: If you purchased your car more than 910 days before filing for bankruptcy, you’re only required to pay back the vehicle’s fair market value. There are a variety of reasons why you should not keep your car in Chapter 13 bankruptcy In certain circumstances, it may not be feasible to keep your car when you are pursuing Chapter 13, or hanging on to your car might not be a good idea. Some instances where this might hold true include: The loan is in arrears and you do not have the money to bring the loan current or to continue making monthly payments. In this scenario you might have to sell the car. The car is not in good condition or not reliable. In these conditions, surrendering the vehicle could make more sense. The car is particularly valuable and selling it could provide cash to pay off your outstanding debts. You have significant equity in the car that surpasses the bankruptcy exemption thresholds in the state you reside in. The most important thing to remember is Filing bankruptcy doesn’t automatically guarantee that a vehicle purchased through secured loan is repossessed. Under the both Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. A bankruptcy lawyer will help you determine which approach to bankruptcy makes the most sense for your personal financial situation.


Written by a Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and

Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to take control of their finances through providing concise, well-studied and well-researched content that break down complex topics into digestible chunks.

Auto loans editor

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