If you're facing Chapter 7 bankruptcy, you may lose your car. However, depending on where you live and your personal circumstances, you may be able to keep your car even if you file Chapter 7. In other instances, filing Chapter 13 may be a better option if you want to keep your car.
Chapter 7 bankruptcy liquidates your assets to provide cash to pay your creditors. However, when you file Chapter 7 bankruptcy, you don't lose everything. The federal government has a list of exemptions, or property that you are allowed to keep. Many states have their own exemption list, and some states allow you to choose between state and federal exemptions. If your state has a generous auto exemption, you may be able to keep a fairly expensive auto that you own free and clear. Consult resources such as the Kelley Blue Book to find your car's private party value, which is the amount you would get if you sold the car to another individual. This value is usually lower than the trade-in value or retail value of your car, and this may result in your car's value being below the exemption limit.
There are two types of debts in a bankruptcy: unsecured debts, such as credit card bills, and secured assets, such as your car. Even after you receive a discharge in Chapter 7, the liens remain on your secured assets, which means that the creditor may seize the car. However, you may also be able to keep your car in a Chapter 7 bankruptcy by redeeming it, which is to pay off the secured portion of the debt. For instance, if you have a car valued at $10,000 but you have a loan of $15,000, you can redeem the car by paying $10,000 in cash. The bankruptcy court would declare the remaining $5,000 as an unsecured debt, and the creditor would no longer have a lien on the car.
If you can't afford to pay the entire secured debt of your car up front, you may still be able to avoid losing it in a Chapter 7 bankruptcy by reaffirming the debt with the creditor and maintaining your regular car payments until the car is paid off. Reaffirming the debt means that your car note is not included in the discharge. This means that if you fall behind in your payments, the creditor will be able to pursue collection procedures against you, including attaching liens on your wages even after repossessing the car.
Chapter 13 Alternative
Unlike Chapter 7, Chapter 13 does not involve liquidation of assets. For this reason, Chapter 13 is often a more attractive option for homeowners and other debtors who have assets that they wish to keep. In a Chapter 13 petition, a debtor works with the trustee assigned to the case to draft a court-approved payment plan to satisfy the debtor's financial obligations over a three- to five-year period. With Chapter 13, car payments are categorized as a secured debt in the payment plan. A portion of your monthly payment to the court is paid to the creditor of your car loan.