How To File for Bankruptcy and Keep Your Car
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Summary:
When you file for bankruptcy, what happens to your car will depend on several factors. These include bankruptcy exemptions in your area, the type of bankruptcy you file, if you owe money on your car, and how much money you owe. In many cases, you will be able to keep your car as long as you make payments on it.
When you are considering declaring bankruptcy, you’re going to have a lot of questions. You might ask, “What happens to my home? What happens to my car during bankruptcy?” Believe it or not, these questions are common among people who are new to bankruptcy. So, what happens to your car during bankruptcy?
Whether or not you can keep your car under Chapter 7 depends on your local bankruptcy exemptions. Though bankruptcy laws overall are federal, property exemptions when filing are determined by the states. If your car’s loan balance is less than the exemption amount in your state, you might be able to keep it. If you cannot exempt this property or owe more than the exemption limit, you may have to sell your car or allow repossession.
Trying to determine where you stand with bankruptcy is rough, especially when you first file for Chapter 7. Let’s talk about it.
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What happens to your car if you declare bankruptcy?
Without a doubt, the surest way to avoid costly errors is to talk to a bankruptcy attorney about your situation and learn about bankruptcy rules specific to your area. In some cases, you may not be able to keep a car with a loan balance. However, it is usually salvageable in most areas.
You are least likely to mess up your bankruptcy filing if you let attorneys evaluate what the best course of action is for your financial situation. Though most laws affecting bankruptcy are federal, certain laws and options vary from state to state. Here’s what to know about how each type of bankruptcy declaration will affect your car.
What happens to a car if I file for Chapter 7 bankruptcy?
Chapter 7 bankruptcy can require the sale of assets that are still carrying a loan balance, but only under certain circumstances.
How to (not) lose your car in Chapter 7
Will you keep your car when filing Chapter 7 bankruptcy, or will you lose it? That depends. Here are four factors to keep in mind.
- If your car loan balance is beneath the exemption limit or has been paid off, you should be able to keep your vehicle. However, some people who are filing bankruptcy may still want to sell their cars to put more money toward retaining ownership of other property they could lose. The prudence of doing this, of course, depends on whether exemption laws in your area will allow you to keep that other property.
- If local laws allow you to exempt the equity on your car and you’re current on car loan payments, you should be able to keep it. The good news is that most states are fairly lenient on car loans.
- If you’re behind on your car loan payments, then the lender may repossess the car. This is why you need to make sure you’re up to date on your monthly payments.
- If the car is nonexempt property, or if you owe more than the exemption limit in your state on the car, then the bankruptcy trustee may sell your car. This is part of being able to repay creditors to the best of your ability.
Pro tip — The surest way to avoid costly errors when filing Chapter 7 bankruptcy is to talk to an attorney who specializes in bankruptcy cases. Your attorney-client relationship means your attorney can’t intentionally put you in a bad situation while you work through the bankruptcy process. Explain everything as best as you can so your attorney can best serve your interests, as required by law.
What happens to a car if I file Chapter 13 bankruptcy?
To make keeping your car through bankruptcy as likely as possible, a Chapter 13 bankruptcy filing could be the best possible route. The good news is that you can factor your car debt into your repayment plan, even if you are behind on payments. In many cases, you can also stop car repossession via an “automatic stay.”
As long as you repay everything, you have a high chance of removing the risk of losing your car. However, if you are behind on your payments and your car equity is lower than the value it offers you, the best option for you financially may be to give the car back to the lender.
Professionals’ tip — You have to prove that your car fees and equity are reasonable in order to maximize your chances of keeping the car. This means that you may have to sell a very expensive car, even if you own the car outright.
With Chapter 13, you have to show that your total disposable monthly income will go to your debt repayment plan. This is extremely important to remember.
Before the court confirms (approves) your Chapter 13 repayment plan, you must show that it represents your “best efforts” to pay back creditors. It’s also called the disposable income test because you must pay all of your disposable income at a minimum…Your disposable income is the amount that remains after deducting allowed living expenses and mandatory payments, such as secured and priority debt payments.” — Attorney Cara O’Neill
If neither Chapter 7 nor Chapter 13 will work for your situation, you may want to consider debt settlement.
How do you maximize your chances of keeping the car during bankruptcy?
It’s important to remember that you can still lose your car during both Chapter 7 and Chapter 13 bankruptcy. For that matter, even some credit cards allow repo during bankruptcy, so your car definitely could end up being a loss. These tips will help minimize the chances of losing your car.
How to avoid losing your car
- Check with a law firm to find out if keeping your car is even an option. Bankruptcy exemptions vary from state to stay, and in some cases, you can even get a motor vehicle exemption. You can try to figure this out with your own research, of course, but consulting a bankruptcy attorney remains the surest way to avoid mistakes.
- Stay up to date on your auto loan, or even pay extra for it. If your state allows you to keep your car through a bankruptcy case, make sure that you stay up to date on your car loans unless instructed otherwise by your attorney. Regular vehicle payments reduce or eliminate the risk of repossession or forced sale.
- Do what you can to get your car to be free and clear of any loans or liens. This includes keeping a car that’s cheaper rather than getting a car loan. If you have a title loan, pay that off immediately before you declare bankruptcy, if possible.
- Consider debt relief or debt settlement before you file for bankruptcy. Depending on your assets, how much debt you have, and other factors, it may make sense to try to negotiate a payment plan or reduce debt by talking with your creditors. (Talking with collection agencies about debt that’s been written off and sold to them, on the other hand, is almost always a bad idea.) If you can get advice about this from a bankruptcy lawyer who knows your unique situation, do so.
Prudent guidance — If you are not sure you want to keep the car, talk to a lawyer who can offer you advice. Sometimes, whether or not it’s a smart idea is all about how much equity you have in the car itself.
If you’re thinking about bankruptcy but hope it might still be possible to salvage your situation and get back on track, looking into credit counseling could be worth your while.
FAQs
Can I sell my car while in Chapter 7?
If you want to sell your car during your Chapter 7 bankruptcy proceedings, you have to get the approval of your trustee. Your bankruptcy lawyer can help you push that request through.
How much does it cost to file bankruptcy?
How much it can cost to file for bankruptcy depends on the state that you live in, the type of bankruptcy you want to file, which bankruptcy attorney you hire, and your budget. Basic bankruptcy filing fees, however, are constant throughout the U.S. Courts. Here’s what you need to know about filing fees.
Chapter 7 total filing fees: $338
- Filing fee: $245
- Administrative fee: $78
- Trustee Surcharge: $15
Chapter 13 total filing fees: $310
- Filing fee: $235
- Administrative fee: $78
Additional fees apply if you want to reopen a closed bankruptcy case, file various motions, have documents certified or reproduced, and so on.
Bankruptcy attorney fees
How much money you should expect to pay for a law firm to help you with your filing depends on the type of bankruptcy that you want to file as well as your location. All law firms have their own pricing, so it’s important to know what to expect.
On average, Chapter 7 bankruptcy will cost about $1,450. Costs range from a high around $2,000 to a low around $1,000. Chapter 13 bankruptcy is more expensive, with an average lawyer and case costing $3,000. Costs for Chapter 13 range from a high of $5,000-plus to a low around $2,000.
What does it mean to go on bankruptcy?
The idiom “go on bankruptcy” means that you are going to be undergoing a legal process that discharges any debt you have. In other words, you’re filing for bankruptcy.
Bankruptcy can involve a repayment plan, selling off equity to pay off debtors, or negotiating with creditors to reduce your loan balance. What property you have to forfeit and how much of your debt you have to pay will vary depending on what type of bankruptcy you file for.
Can I get a car loan after bankruptcy?
This depends on the lender and how much of a down payment you offer. Most lenders will not allow you to borrow immediately after a filing, but it is possible to find a high-risk auto loan if you need a new car. You can read up more about loan options after bankruptcy here.
Key Takeaways
- In many, if not most, cases, you should be able to keep your car when you declare bankruptcy.
- If you are behind on loan payments or have almost no equity in the car, you may have to sell it for its fair market price in order to continue with bankruptcy proceedings.
- The surest way to prevent losing your car is to try to get debt relief (such as through debt consolidation) first, thus avoiding bankruptcy altogether.
- The type of bankruptcy you can declare will also affect your chances of keeping or losing your car.
- Always ask your bankruptcy lawyer to advise you on how to keep the car, since state exemption laws vary greatly.
- If you’re handling your own bankruptcy, perhaps because you have few assets to protect, be sure to thoroughly research any topic other bankruptcy filers could leave to their attorneys.
Learn all you can before and while taking action
Bankruptcy is not something anyone wants to think about or experience, but it can happen if you can’t get debt relief in time. Every bankruptcy case is different, so it’s best to learn as much as you can while you consult your lawyer. (If you don’t have a lawyer, learning as much as you can is even more important.)
If you have any questions you want answered, check out SuperMoney’s bankruptcy articles. Our comprehensive library covers everything from tax debt to debt settlement.
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