Can I Keep My Car If I File Bankruptcy?

In New York, when you file a Chapter 7 bankruptcy, you are allowed to keep a car with up to $2,400 in equity. For example, if you own a car worth $10,000 and you still owe $8,000 on the car loan, your equity is $2,000 and accordingly, you may keep that car. To find the value of your car, go to www.kbb.org.

If your car is worth only slightly more than the allowed $2,400 exemption, most bankruptcy trustees will still allow you to keep your car. If it is worth a good amount more than the allowed $2,400, you may be able to buy your car back from the trustee. For example, if you have $6,000 in equity, your car is worth $3,600 over the allowed $2,400. If the trustee were to sell your car, the trustee would incur expenses and may only net $2,500. You may offer to pay the trustee $2,500 and keep your car. The trustee may even allow you to pay the $2,500 over several weeks or months.

If you wish to keep your car in a Chapter 7 bankruptcy, you must be current on your car loan. You have the following options regarding the car loan:

Reaffirmation – With this option, you sign a reaffirmation agreement with the lender. If you reaffirm the loan, you agree to continue to be responsible for the car loan, and you will make payments as though you never filed the bankruptcy. Sometimes the lender will agree to a reduction in the amount owed or interest rate. If you don’t keep your payments current, the lender can repossess the car and sue you for the money owed on the loan.

Keep the car and don’t reaffirm the loan – If you do this, the lender can still repossess the car if you don’t keep the payments up to date; however, the lender can’t sue you for the money owed on the loan. The downside to this option is that the lender will stop sending you bills, so it will be your responsibility to keep track of your payments. Furthermore, your lender won’t report your payments to the credit reporting agencies. This is not helpful if you’re interested in rebuilding your credit.

Redeem the car – You may reduce the auto loan amount to the fair market value of the car. The problem with this is that you need to have the money available to pay the fair market value. If you had that money available, you probably wouldn’t be filing bankruptcy. Also, you would need to obtain the approval of the bankruptcy court.

If you don’t want to keep your car, you may simply return the car to the lender. This is called surrender. If you surrender the car, be sure to get a receipt from the lender. Once your Chapter 7 bankruptcy is approved, you will not owe anything for the car. Keep in mind that if you have a co-signor for the car loan, the co-signor will still be responsible for the auto loan unless the co-signor also files bankruptcy.

If you file a Chapter 13 bankruptcy, there is no limit on the amount of equity that you can have in your car and keep it. However, the amount of equity that you have in your car may affect the amount of money you must pay back to your creditors in the payment plan.