What Happens to Your Car in Bankruptcy?
What happens to your car in bankruptcy depends on three things: which chapter you file, whether you’re current on payments, and how much equity you have. Here’s how each scenario actually plays out.
If your car is paid off
A car you own outright is an asset that becomes part of your bankruptcy estate, but every state provides a motor vehicle exemption that lets you protect at least some of its value. Exemption amounts vary widely by state, from a few thousand dollars to unlimited in a handful of states, and many states also let you apply an unused portion of a “wildcard” exemption to a car if the vehicle exemption alone doesn’t cover its full value. If your car’s value is fully covered by your exemptions, you keep it in both Chapter 7 and Chapter 13. If it isn’t, in Chapter 7 the trustee could theoretically sell it and pay you the exempt portion in cash, though trustees rarely do this for an ordinary used car once selling costs are factored in — it’s more of a risk for a car that’s unusually valuable relative to your other assets.
If you’re still making payments and current
Most car loans are secured debt, meaning the lender has a lien on the title. In Chapter 7, if you’re current on payments and want to keep the car, you’ll typically sign a reaffirmation agreement — a new contract with the lender that keeps you personally liable for the loan even after your other debts are discharged, in exchange for keeping the car. Reaffirmation is optional, and it’s worth thinking carefully about: if you fall behind after reaffirming, the lender can repossess the car and still sue you for any remaining balance, since the debt was never actually discharged. Some districts also allow a “ride-through,” where you simply keep paying as agreed without signing anything, though not all courts and lenders permit this. In Chapter 13, you don’t reaffirm — you keep the car as long as you stay current on payments (often folded into your repayment plan) and complete the plan.
If you’re behind on payments
Falling behind changes the calculus. In Chapter 7, the automatic stay temporarily stops repossession when you file, but if you can’t catch up and don’t reaffirm with a new payment arrangement, the lender will eventually get relief from the stay and repossess the car once the case closes or sooner. In Chapter 13, this is often the better option if you want to keep a car you’re behind on: your repayment plan can include the past-due amount spread over the plan’s three-to-five-year length, and in some cases — if you bought the car more than 910 days before filing — you may be able to “cram down” the loan to the car’s current market value rather than the higher original loan balance, reducing what you owe.
Surrendering the car instead
If the car isn’t worth keeping — because you’re underwater on the loan, can’t afford the payments even restructured, or simply don’t need it — you can surrender it in either chapter. The lender repossesses it, and any remaining deficiency balance after resale (the gap between what you owed and what the car sold for) is an unsecured debt that gets discharged along with your other debts in Chapter 7, or paid at whatever rate your other unsecured creditors receive in Chapter 13.
What to decide before you file
Before filing, get a clear picture of your car’s current market value versus your loan balance, check your state’s motor vehicle and wildcard exemption amounts, and decide honestly whether the car is worth keeping given your post-bankruptcy budget. This is one of the more consequential decisions in a filing, and if your equity is close to your exemption limit or you’re behind on payments, it’s worth a consultation with a bankruptcy attorney even if you’re otherwise filing on your own.