Can I Keep My Car in Bankruptcy?
UPDATED: February 14, 2020
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There are ways to keep your car when you file for bankruptcy. Your car loan and the type of bankruptcy you file will determine which options you can choose.
Factor: How Much Is Owed on the Car?
The first factor to consider is how much you owe on your car. If you own your car free and clear, you can claim it as exempt property and it will be protected in the bankruptcy process. This means you get to keep your car when you file. If you still have a minimal amount to pay, you may try to pay off the car and save it during the bankruptcy process. If you have a substantial amount to pay, and you do want to keep the car, your options will depend on whether you file a Chapter 13 or 7 bankruptcies.
Factor: Which Type of Bankruptcy Are You Filing?
Under Chapter 13, debtors must repay the entire car loan if they bought a car within 910 days (two and half years) of the bankruptcy filing. For example, if you had an outstanding balance of $5000 on a car loan whose blue book value was only $3000, you would be required to pay the entire $5000 balance (assuming you want to keep the car) if the car was purchased less than 30 months of filing. In short, debtors who want to keep their cars must pay the full loan amount, rather than "strip down" the debt to just the value of the car.
If your car note is more than 910 days old, you may qualify for a “cram down” procedure where you only pay the current value of the car instead of the full amount of the loan. Even though this doesn’t discharge the debt, it could significantly reduce the amount you owe on the note.
Cars are harder to redeem in Chapter 7 cases, since the law now requires paying the lender the retail replacement value of the car. That value is generally higher than the private sale value that was commonly used under prior law. It remains possible for a debtor to surrender a car when keeping up the payments will be impossible. You may also be able to “reaffirm” the debt on the car loan, but you will still be subject to your car being repossessed if you miss payments later. Before you decide to “redeem” or “reaffirm” your car note, review you options and consequences with a bankruptcy attorney to make sure that you continue moving in the right direction for your financial recovery.