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Can I file for bankruptcy and keep my car?
It's possible, though you typically need to be current on your car loan payments to qualify.
How do I keep my car after filing Chapter 7 bankruptcy?
There are several ways to keep your car after you file for Chapter 7 — the most extreme form of bankruptcy. Even if you have a car loan, there are a few options to rework repayments to fit your current budget.
Claim a motor vehicle exemption
- Best for: When you own your vehicle outright.
An exemption is a bankruptcy law that lets you keep certain assets when you file for bankruptcy. A motor vehicle exemption lets you keep a car or other vehicle by protecting some or all of the equity that you own in the vehicle. Most states have limits to how much equity you can claim.
If your car’s value is fully or mostly covered by the state exemption, you can keep your car. If not? The contractor appointed to manage your case — called the trustee — can sell the car to pay off your creditors and reimburse you the exemption amount.
Let’s take a look at an example …
Say you own a car with a market value of $5,000. You live in a state that offers a $6,000 motor vehicle exemption. After claiming your exemption, you get to keep your car.
But say you lived in a state where the exemption was only $3,000. In that case, the trustee could repossess the car, sell it and send you a check for $3,000.
Claim a wildcard exemption
- Best for: When a motor vehicle exemption doesn’t cover the full value of your car.
Some states also have a wildcard exemption, which you can use to protect any property you choose. You can use this to cover the remaining value of your car if it’s worth more than your state’s exemption. Often the wildcard exemption is lower than the motor vehicle exemption.
Reaffirm your car loan
- Best for: When you’re still paying off your car loan.
A reaffirmation agreement is a new contract with your lender that lets you take your car loan out of the bankruptcy proceedings. Generally, you’ll get a reduced interest rate and loan balance.
But the bankruptcy court must approve it first. If you don’t have solid proof of income to cover repayments, you won’t be approved. And if you default, the lender can sue you — and you won’t have the option to file for bankruptcy again for another eight years.
File a motion to redeem
- Best for: Recently purchased or upside-down car loans.
This option allows you to trade in your current car loan for a new one with a balance that reflects the market value of your car. For example, if you owe $10,000 on a car that’s worth $7,500, your new balance would be $7,500 after a motion to redeem.
Like with reaffirmation, you’re required to get your new loan approved. After you find a lender and get approved for a loan, you must file for a motion to redeem with the bankruptcy court. The court and the two lenders will determine the fair market value of the car.
Continue repayments with your current lender
- Best for: When you’re still paying off your car loan.
While technically not a part of bankruptcy law, some lenders may be willing to let you keep your car as long as you continue paying off your car loan on time. While they have the right to repossess your vehicle, many would rather not — that process can be expensive.
The downside to this option is that your lender can repossess your car at any time, even if you stick to the repayment schedule.
Negotiate down your balance
- Best for: When you’re upside down on your car loan.
If you can’t afford your current car loan payments, you can talk to your lender yourself and try to come up with an agreement outside of the court. Some might be willing to lower your balance to reflect the market price of your vehicle.
You’ll generally need to be current on your payments for this to work. And credit unions are often more flexible than other types of creditors.
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Can I keep my car with Chapter 13 bankruptcy?
Yes, Chapter 13 bankruptcy generally lets you keep your assets, including your car. Unlike Chapter 7, which cancels most of your debts, Chapter 13 renegotiates your payment plans to fit your current income.
Bankruptcy doesn’t mean you have to lose your car. There are several options, even if you don’t fully own your car outright. But you might have a harder time holding on to your vehicle if you’re behind on your car loan repayments.
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