Can I Keep My Car in Bankruptcy?

How Bankruptcy Affects Your Vehicle

Whether you can keep your car in bankruptcy depends on three main factors: your vehicle equity, your state's vehicle exemption, and whether you can afford to make the payments if you have a car loan or lease.

Understanding Vehicle Equity

Vehicle equity is the difference between what your car is worth and what you owe on it:

Example Equity Scenarios

Vehicle Exemptions by State

Every state has a vehicle exemption that protects a certain amount of equity in your car. The amount varies significantly:

State	Vehicle Exemption
Texas	One vehicle per licensed driver, unlimited value
Florida	$1,000
California	$3,325 (System 1) or $6,375 (System 2)
New York	$4,825 (state) or $4,450 (federal)
Federal Exemptions	$4,450 (if your state allows federal exemptions)

View vehicle exemptions for all 50 states →

Keeping Your Car in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, you have three main options for dealing with a financed or leased vehicle:

Option 1: Reaffirmation (Keep the Car and the Debt)

A reaffirmation agreement is a new contract with your lender where you agree to remain personally liable for the car loan even after bankruptcy. This means:

• You keep the car and continue making payments
• You remain liable for the debt after bankruptcy discharge
• The lender can repossess if you miss payments later
• You can still owe money if the car is repossessed and sold for less than you owe (deficiency balance)
• The debt reports to credit bureaus, and on-time payments can help rebuild credit

When to reaffirm: If you can comfortably afford the payments, want to rebuild credit through on-time payments, and the loan terms are reasonable.

When NOT to reaffirm: If payments are a struggle, the car is worth much less than you owe, or you might need to surrender it in the future.

Option 2: Redemption (Buy the Car for Current Value)

Redemption allows you to purchase your car from the lender for its current market value (rather than what you owe) in a single lump-sum payment.

Pros: You own the car outright for less than you owe. Cons: Requires a lump sum payment (though some companies offer redemption financing).

Option 3: Surrender (Give Back the Car)

You can surrender your vehicle to the lender and eliminate the entire debt through bankruptcy discharge. This makes sense if:

• You can't afford the car payments
• The car needs expensive repairs
• You're significantly underwater on the loan
• You don't need the vehicle
• You can get a more affordable vehicle after bankruptcy

After surrendering the vehicle in Chapter 7, you won't owe any deficiency balance - the entire debt is discharged.

Option 4: Ride-Through (Unofficial Option)

In some jurisdictions, you can do an unofficial "ride-through" where you keep the car and continue making payments without signing a reaffirmation agreement. This provides the best of both worlds:

• You keep the car by staying current on payments
• The debt is discharged (you're not personally liable)
• If you later can't afford it, you can surrender without owing a deficiency

Note: Not all lenders or courts allow ride-through. Some lenders require reaffirmation or will repossess. Consult your bankruptcy attorney about local practices.

Keeping Your Car in Chapter 13 Bankruptcy

Chapter 13 provides additional powerful options for dealing with vehicle loans:

Catch Up on Past-Due Payments

If you're behind on car payments, Chapter 13 allows you to catch up on arrears through your repayment plan while making current payments. This stops repossession immediately.

Cramdown (910-Day Rule)

If you purchased your vehicle more than 910 days (about 30 months) before filing bankruptcy, you may be able to "cram down" your car loan to the car's current value.

Important: Cramdown only applies to vehicles purchased more than 910 days before filing. Recently purchased vehicles must be paid in full at the contract rate.

Lower Interest Rates

Chapter 13 allows you to reduce the interest rate on your car loan to the current market rate (often called the "till rate" or "prime-plus" rate), which is typically much lower than subprime auto loan rates. This can save hundreds per month.

Extend the Repayment Period

You can stretch car loan payments over the length of your Chapter 13 plan (up to 5 years), which lowers your monthly payment and makes the car more affordable.

Leased Vehicles in Bankruptcy

If you lease a vehicle, you have two main options in bankruptcy:

Assume the Lease

You can continue the lease by staying current on payments. In Chapter 7, you may need to sign a reaffirmation-like assumption agreement. In Chapter 13, the lease payments are included in your plan.

Reject the Lease

You can return the leased vehicle and discharge any early termination fees or deficiency amounts through bankruptcy. This eliminates potentially thousands of dollars in lease-end obligations.

Multiple Vehicles in Bankruptcy

You can protect multiple vehicles if your state exemptions allow it:

• Texas: One vehicle per licensed household member, unlimited value
• States allowing federal exemptions: Each spouse can claim the $4,450 federal vehicle exemption for their own car
• Wildcard exemptions: Some states offer wildcard exemptions that can protect equity in additional vehicles
• Negative equity vehicles: If you owe more than a vehicle is worth, you can keep unlimited vehicles by continuing payments

Common Scenarios and Solutions

I'm Behind on Car Payments and Facing Repossession

Solution: File Chapter 13 bankruptcy to immediately stop repossession through the automatic stay and catch up on missed payments over 3-5 years while making current payments.

I Owe More Than My Car is Worth

Solution: If the car is older than 910 days, file Chapter 13 and cram down the loan to the car's current value. If newer, you can still reduce the interest rate and extend payments.

My Car Payment is Too High

Solution: In Chapter 13, reduce the interest rate and extend the payment period to lower monthly payments. Or in Chapter 7, surrender the vehicle and eliminate the debt, then purchase a more affordable car after bankruptcy.

I Own My Car Free and Clear But It's Worth More Than My Exemption

Solution: Use wildcard exemptions if available, file Chapter 13 and pay the non-exempt equity to creditors through your plan, or pay the trustee the non-exempt amount to keep the car in Chapter 7.

I Just Bought a Car Before Bankruptcy

Solution: You can still keep it, but the 910-day rule prevents cramdown in Chapter 13. You'll need to reaffirm in Chapter 7 or pay the full loan amount through Chapter 13 at the contract rate.

Steps to Keep Your Car in Bankruptcy

Before Filing

1. Determine your car's value - Use Kelley Blue Book, NADA, or Edmunds
2. Calculate your equity - Value minus loan balance
3. Check your state's vehicle exemption - See if your equity is protected
4. Review your loan contract - Note the interest rate, payment amount, and purchase date
5. Assess affordability - Can you afford current payments?
6. Consider 910-day rule - Calculate if you're eligible for cramdown

During Bankruptcy

1. Continue making payments - Stay current on car payments during bankruptcy
2. Properly claim exemptions - Ensure vehicle exemption is correctly listed
3. Decide on reaffirmation - In Chapter 7, choose whether to reaffirm
4. File statement of intention - Tell the court your plan for the vehicle within 30 days
5. Complete reaffirmation/redemption - Within 45 days of the 341 meeting

After Bankruptcy

1. Continue payments - Keep making on-time payments if you kept the vehicle
2. Maintain insurance - Keep required insurance coverage
3. Build credit - On-time car payments help rebuild your credit score

Frequently Asked Questions

Can I buy a car during bankruptcy?

In Chapter 7, wait until after discharge (usually 3-4 months). In Chapter 13, you need court approval to take on new debt, but courts typically allow purchasing a reliable vehicle if needed for work.

What if I need a car but mine was repossessed before filing?

You can purchase a car after filing Chapter 7, or with court approval during Chapter 13. Some "buy here, pay here" dealerships specialize in post-bankruptcy auto loans, though rates may be higher.

Will bankruptcy stop a repossession?

Yes, immediately. The automatic stay stops all collection activities, including repossession. If your car was repossessed but not yet sold, you may be able to get it back by filing bankruptcy quickly.

Should I reaffirm my car loan?

Only if you can comfortably afford the payments and want the debt to appear on your credit report. Reaffirmation removes the bankruptcy protection, so if you later can't pay, you could owe a deficiency. Many attorneys recommend ride-through if available.

Can I trade in my car before bankruptcy?

Be very careful. Trading in a car shortly before bankruptcy can be seen as fraud, especially if you're trying to hide equity. Consult a bankruptcy attorney before making any major financial transactions before filing.

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