Can I Keep my Car if I File Bankruptcy?

The answer is yes, with certain limitations. If you have a car loan and want to keep the car, you must continue to make payments on that loan. If you are filing a Chapter 7 bankruptcy and want to keep the car, you must be current on the car loan. If you are filing a Chapter 13 bankruptcy and are behind in your payments, you may catch up on your payments in the Chapter 13 payment plan. 

In New York, when you file a Chapter 7 bankruptcy, you are allowed to keep a car if you have no equity or even if you have equity, however the amount of equity that you are allowed is limited and will depend on whether you are using the New York bankruptcy exemptions or the federal bankruptcy exemptions. 

If you are using the New York bankruptcy exemptions, you are allowed up to $4,425 in equity. For example, if you own a car worth $15,425 and you still owe $11,000 on the car loan, your equity is $4,425. Accordingly, you may keep that car. If you are disabled and own a car or van that has been specially equipped, you are allowed up to $11,025 in equity. In addition to these amounts, New York has a $1,100 “wildcard” exemption that you can use as long as you do not also use New York’s homestead exemption or you use the wildcard exemption to protect some other asset. To find the value of your car, go to www.kbb.org. 

If you use the federal bankruptcy exemptions, you will be allowed up to $3,775 in equity. Although this amount is less than the New York bankruptcy exemptions, the federal bankruptcy exemptions have additional wildcard exemptions of $1,150 and $12,625. These wildcard exemptions may not be available if you are using the federal homestead exemption or if you need to use some or all of these exemptions for other assets. 

If your car is worth only slightly more than the allowed equity amount, most bankruptcy trustees will still allow you to keep your car, although the bankruptcy trustee may require that you pay the excess amount to the bankruptcy the trustee. 

As stated above, if you wish to keep your car in a Chapter 7 bankruptcy, you must be current on your car loan. You have the following options regarding the car loan: 

Reaffirmation – With this option, you sign a reaffirmation agreement with the lender. If you reaffirm the loan, you agree to continue to be responsible for the car loan, and you will make payments as though you never filed the bankruptcy. Sometimes the lender will agree to a reduction in the amount owed or in the interest rate. If you reaffirm the debt, but thereafter do not keep your payments current, the lender can repossess the car and sue you for the money owed on the loan. 

Keep the car but do not reaffirm the loan, also known as a “ride through” – If you do this, the lender can still repossess the car if you do not keep your payments up to date. However, the lender cannot sue you for the money owed on the loan.This approach may be appropriate if you owe more than the car is worth, which is known as negative equity (being under water), or if you are not confident that you will be able to keep current on the loan payments. The downside to this option is that the lender will stop sending you bills, so it will be your responsibility to keep track of your payments. Furthermore, your lender will not report your payments to the credit reporting agencies, which means that your payments will not help you to rebuild your credit. 

Redeem the car – You may reduce the auto loan amount to the fair market value of the car. The problem with this is that you must have the money available to pay the fair market value. If you had that money available, you probably would not be filing for bankruptcy. If you have a friend who is willing to pay the fair market value for you, this may be a good option if the fair market value is much less than what is owed on the car. To redeem the car, the approval of the bankruptcy court is needed.

If you decide not to keep your car, you may simply return it to the lender. This is called a voluntary surrender. If you surrender the car, be sure to get a receipt from the lender. Once your Chapter 7 bankruptcy is approved, you will not owe anything for the car. Keep in mind that, if you have a co-signer for the car loan, the co-signer will still be responsible for the auto loan, unless the co-signer also files for bankruptcy.

If you file a Chapter 13 bankruptcy, there is no limit on the amount of equity that you can have in your car and still keep it. However, the amount of equity that you have in your car may affect the amount of money that you must pay back to your creditors in the payment plan.