The short answer to this question is, “You can often keep your car when filing Chapter 7 bankruptcy.” If you are asking yourself, how much debt do I need to file bankruptcy or does bankruptcy clear judgments? That is totally understandable and there are resources to help you understand that more. Before getting started, it is important to note that bankruptcies can vary slightly based on where they are filed. This can be due to vehicle bankruptcy exemptions For instance, a Chapter 7 bankruptcy Illinois may look different from a Chapter 7 filing bankruptcy Indiana in terms of how they do bankruptcy exemptions.

As you read this article, you will know the different methods that are available to protect your car from being liquidated by the bankruptcy trustee. Also, you should be sure that keeping your vehicle is the right decision to take, if not, then you should let it go—to truly know, you should consider essential pieces of information that will be discussed shortly. You may also have to try out our Chapter 13 Repayment Calculator as it takes your vehicle equity into consideration.


What is the current equity on my vehicle?

If you own a vehicle without any loan and lien on the vehicle, then your equity on that vehicle will be the current market value. You can easily come up with the correct market value on a vehicle by researching the make and model of your website on affiliate websites like Kelley Blue Book or Edmunds—this helps you to come up with a perfect estimate. If you’re making a payment towards the vehicle, then you’ll need to subtract your debt on the vehicle from the current market value of the vehicle.

Let’s cover an exact situation. For example, let’s say you are filing a Chapter 7 bankruptcy in Michigan where you find that the auto exemption is $2,775 (Source). If you have a vehicle with $25,000 in equity in Michigan, that vehicle may be at risk in a Chapter 7 bankruptcy. If this is the case, you may be at risk of losing that asset, so a Chapter 13 bankruptcy may be an option if you want to keep that asset and file bankruptcy.


Am I Current on my Car Payments?

The other question you may want to answer is if you’ve not fallen out of schedule on your agreed monthly payment. You need to know if your lender has access to use your vehicle as collateral. Your payment status has a vital role in determining if you’ll keep your car or the bankruptcy trustee will liquidate it.

When you know the answer to these questions, you can now start applying those answers to each question. Let’s first see what happens to your car when you’re filing for a Chapter 7 bankruptcy discharge.


Keeping Your Vehicle in Chapter 7 Bankruptcy

The major purpose of filing for Chapter 7 bankruptcy is to get a bankruptcy discharge on debt—this might involve giving the non-exempt properties to a trustee who then sells them and uses the money realized to pay-off the debtor’s liability to non-secured creditors (unsecured debt are those debts that are not linked to assets, e.g., medical bills or credit card debt)

The process gives us the opportunity for a fresh financial start while offsetting a very small percentage of the amount owed. As you start working your way through the Chapter 7 bankruptcy process, you will come across three options on your vehicle.

  • Cover your equity on your car with a bankruptcy exemption

You’ll have access to some exemptions in your Chapter 7 bankruptcy plan. Your bankruptcy trustee will sell off your remaining assets to offset your debt. If there is an exemption category that’s available for your car, then you can opt to claim that equity in your car.

  • Reaffirm the Loan

The process of reaffirmation involves recommitting to your already existing car loan and getting approval by the court. If an agreement is made in the bankruptcy court between you, your trustee and your creditors, then you’ll have access to use your vehicle, provided you commit to repay your loan principal and interest, not exempting fees that have accrued from late payments.

  • Move to Redeem the Vehicle

If you can come up with the right amount of money, you can move to redeem your vehicle, in spite of the fact that you’re filing for bankruptcy. The act of redeeming your vehicle is the process of paying the value of the car to your lender rather than pay what you currently owe on the car. To qualify for redemption, then your bankruptcy payment plan must accommodate the payment.


Surrendering the Car

If you don’t want to keep the car, then you can surrender the car during your Chapter bankruptcy process. This is the best option for individuals who don’t have an extra income to cover the cost of paying a car loan and a bankruptcy payment plan.


Bottom Line

Since you’re now familiar with the options at your disposal, you can make use of any of the processes above to keep your vehicle; however, the process requires some hard work.

Don’t automatically decide that you want to keep your car at all costs, as you need to first weigh your options and decide if that is the best route to follow. When filing bankruptcy is important to understand that some rules are dependent on where you are in the country. For instance, you will research filing bankruptcy in Indiana or filing bankruptcy in Tennessee if you are filing in either of those states.