Can Cars Be Kept If Filing for Chapter 7 Bankruptcy?

By Beverly Bird

Bankruptcy -- particularly Chapter 7 -- can be a complicated series of legal options. You might decide you want to keep some property, while you're more willing to let other things go. If you want to keep certain assets, such as your car, you can't discharge the debts associated with them. You must either address the loan against the vehicle, or -- if you own it free and clear -- you must protect your equity in it. You've got some choices regarding how to do this.

Exemptions

When you file for Chapter 7, you effectively give your consent for the trustee to take your property and liquidate it to pay your creditors as much as possible. This sounds harsh, but the reality is that the trustee won't sell all your property because you're allowed exemptions. The federal government offers one list of exemptions, and individual states have their own lists. Some allow you to use one or the other, but in a few states, you're confined to using their own. Exemptions are dollar amounts in various property that you're allowed to keep.

Protecting Your Vehicles

If you use a vehicle exemption to protect your car, and if the exemption is more than your car is worth, the trustee can't sell the vehicle. For example, the vehicle exemption in Oklahoma is $7,500. If your car is worth less than that, or if you have a loan against it so your equity is less, you can keep the car. If it's worth more than your exemption amount, you may still be able to keep it, but you'll have to get creative. If you use the federal exemption list, this includes a wildcard -- you can use this exemption on any property you like. Some states offer wildcard exemptions as well. Therefore, if your car is worth $10,000, you can use your vehicle exemption to protect a portion of its value and the wildcard exemption to protect the balance. Doubling up on exemptions can also help if you're trying to protect more than one vehicle -- you can use one on each car. If there's still unprotected equity, you can give the trustee an amount of money equal to this value.

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Reaffirming the Loan

You must also deal with the loan against your car if you don't own the vehicle free and clear, and there are a couple of ways to do this. One option is to sign a new contract with the lender, called a reaffirmation agreement. This supersedes your old contract, and you can continue making payments as before. The loan is not discharged in your bankruptcy, however, so the lender can repossess the car if you should fall behind with your payments in the future. You must have the court's permission to reaffirm a loan, and some judges are more willing to give this than others. The judge will want some assurance that you'll be able to afford the payments after your other debts are discharged, and that keeping the car under these terms is in your best financial interests.

Redeeming the Car

Redeeming your car might be an option if you owe more than it's worth. You can get rid of the old loan against it, discharging it, in exchange for paying the lender the vehicle's value instead. For example, if you have a $9,000 loan but the car is only worth $7,500, you can pay the lender the amount and keep the vehicle free and clear. You must pay it all at once, but some lenders offer bankrupt debtors special redemption loans to help them do this. You must still qualify for the loan, even though you're in bankruptcy, and the interest rates tend to be high.

Leased Vehicles

If your vehicle is leased, saving it is a much simpler process. If you don't want to keep it, you can stop making the payments and the dealership will take the car back. If you want to keep it, continue making the payments. You can assume the lease as part of your bankruptcy proceedings.

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Can I Convert to a Chapter 7 Without Losing My House or Car?

References

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