Yes, You Can Keep Your Car When You File a Chapter 7 Bankruptcy
Many people who could benefit from a Chapter 7 bankruptcy are reluctant to file because they fear losing their car. In most instances, that fear is unfounded as most people who file a Chapter 7 bankruptcy are able to keep all of their personal property, including their car. Why? The bankruptcy law exists to give people a chance for a fresh start so it allows them to keep the things that they need to live and to earn a living, including their car. There are three ways you can protect your car when you file a Chapter 7 bankruptcy.
If your car is paid off, you can generally use a bankruptcy “exemption” to protect both your car and the equity in your car. When you file a Chapter 7 bankruptcy you are allowed, by law, to protect a certain amount of personal property (furniture, clothing, jewelry, car, etc.) from your creditors and to keep that property. While the amount of property that can be protected by exemptions varies from state to state, the bankruptcy exemptions are usually generous enough to let you keep your car.
If you are still making payments on your car, “reaffirmation” allows you to continue paying and keep your car. A reaffirmation agreement is a basically a new promise to repay a debt that would otherwise be eliminated in your bankruptcy. When you reaffirm a loan, you continue making the payment as if the bankruptcy had not happened. Before entering into a reaffirmation agreement on a car you should carefully consider, based on the condition of the car and how much you owe, whether your car is worth keeping. A low mileage, reliable car is a good candidate for reaffirmation while a car with high mileage, a poor service history, and/or a high balance due is probably not. Remember, since you are unlikely (or perhaps unable) to file bankruptcy a second time, you should avoid as many post-bankruptcy risks as possible. Reaffirming any loan is always risky and the decision to do so should be made carefully.
While the bankruptcy law allows you to continue making your car payment and keep your car, that option does not make much sense if you owe more than your car is worth. If your car is worth less than you owe, the bankruptcy law offers a process called “redemption” that allows you to keep your car and pay only the actual value of the car. In a redemption, the bankruptcy court orders the lender to accept a single, lump sum payment of the current market value of your car as payment in full for your car. Even if you need to take out a redemption loan (available from several finance companies) to pay the lump sum, you may still end up with a significantly lower car payment.
Because everyone’s situation is unique, you should consult an experienced bankruptcy attorney for a fuller explanation these options and to help you choose the one that best protects your rights and property, including your car.