Can I File Bankruptcy and Keep My Car

Yes, you can often file bankruptcy and keep your car—especially if it’s essential for work or family life. The key lies in understanding exemptions, equity, and your specific bankruptcy chapter. With smart planning and legal guidance, many people retain their vehicle while getting a fresh financial start.

Key Takeaways

• Bankruptcy doesn’t automatically mean losing your car: Most filers can keep their vehicle by using state or federal exemptions to protect equity.
• Chapter 7 vs. Chapter 13 matters: Chapter 7 may require reaffirming debt or redeeming the car, while Chapter 13 lets you keep the car and repay arrears over time.
• Equity determines your options: If your car has little or no equity (value minus loan balance), it’s easier to protect from liquidation.
• Reaffirmation agreements are common in Chapter 7: Signing one keeps you responsible for payments but lets you keep driving the car.
• State exemptions vary widely: Some states offer generous vehicle exemptions (up to $10,000+), while others are more limited—know your state’s rules.
• Stay current on payments: Falling behind increases repossession risk, even during bankruptcy.
• Consult a bankruptcy attorney: A lawyer helps you choose the best strategy to protect your car and maximize debt relief.

Can I File Bankruptcy and Keep My Car?

Filing for bankruptcy is one of the most stressful financial decisions a person can make. Between mounting debt, creditor calls, and the fear of losing everything, it’s natural to worry about what you’ll be left with—especially your car. After all, for most people, a vehicle isn’t just a luxury; it’s a lifeline to work, school, medical appointments, and family responsibilities.

The good news? You can often file bankruptcy and keep your car. While bankruptcy involves surrendering certain assets to pay creditors, the law recognizes that some possessions are essential for rebuilding your life. Your car may be one of them—especially if it’s necessary for employment or daily living. The key is understanding how bankruptcy works, what protections exist, and how to use them wisely.

This guide will walk you through everything you need to know about keeping your car during bankruptcy. We’ll cover the differences between Chapter 7 and Chapter 13, how exemptions work, what happens if you’re behind on payments, and practical steps you can take to protect your vehicle. Whether you’re driving a paid-off sedan or still making payments on a newer model, there are strategies to help you stay on the road.

Understanding Bankruptcy and Asset Protection

Bankruptcy is a legal process designed to help individuals and businesses eliminate or repay debts under court protection. In the U.S., the two most common types for individuals are Chapter 7 (liquidation) and Chapter 13 (reorganization). Both can stop creditor harassment, halt wage garnishments, and provide a path to financial recovery—but they handle assets differently.

In Chapter 7 bankruptcy, a trustee may sell (liquidate) non-exempt assets to pay back creditors. However, not all property is up for grabs. The law allows you to keep certain “exempt” assets, including a portion of equity in your home, personal belongings, retirement accounts, and—yes—your vehicle. These exemptions vary by state and can make a huge difference in whether you keep your car.

Chapter 13 bankruptcy works differently. Instead of liquidating assets, you propose a 3- to 5-year repayment plan to catch up on missed payments (like mortgage or car arrears) while keeping your property. This makes Chapter 13 especially useful if you’re behind on car payments but want to keep the vehicle.

The bottom line: bankruptcy doesn’t mean automatic loss of your car. With the right approach, many filers walk away with their vehicle intact—and a fresh start.

How Exemptions Protect Your Car

Exemptions are the backbone of asset protection in bankruptcy. They allow you to shield a certain amount of equity in your property from being seized by the bankruptcy trustee. For cars, most states offer a specific “vehicle exemption” that lets you protect a dollar amount of equity in your automobile.

For example, if your state allows a $5,000 vehicle exemption and your car is worth $8,000 with a $3,000 loan balance, you have $5,000 in equity ($8,000 – $3,000). That means all of the equity is protected, and the trustee likely won’t sell the car. But if your equity exceeds the exemption—say, $7,000 in a state with a $5,000 exemption—the trustee might sell the car, pay you the exempt amount, and use the rest to pay creditors.

Some states also allow you to use a “wildcard” exemption, which can be applied to any asset, including your car. If your vehicle exemption is low, the wildcard can help cover the gap. For instance, if your car has $6,000 in equity but your vehicle exemption is only $3,000, a $3,000 wildcard exemption could protect the remaining equity.

It’s important to note that you must choose between state and federal exemptions—you can’t mix and match. Some states require you to use their exemptions; others let you choose. A bankruptcy attorney can help you pick the best option for your situation.

The Role of Equity in Keeping Your Car

Equity is the difference between what your car is worth and what you owe on it. It’s the single most important factor in determining whether you can keep your vehicle during bankruptcy.

Let’s break it down with examples:

– Paid-off car worth $4,000: You have $4,000 in equity. If your state’s vehicle exemption is $5,000, you’re fully protected.
– Car worth $12,000 with a $10,000 loan: Equity is $2,000. Even with a modest exemption, you’ll likely keep the car.
– Car worth $15,000 with a $5,000 loan: Equity is $10,000. If your exemption is only $6,000, the trustee may sell the car unless you can pay the non-exempt $4,000.

In cases where equity exceeds the exemption, you may still be able to keep the car by “buying back” the non-exempt portion from the trustee. This is called a “buyout” and requires negotiating a lump-sum payment. While not always feasible, it’s an option worth discussing with your attorney.

Chapter 7 Bankruptcy and Your Car

Chapter 7 bankruptcy is often called “straight bankruptcy” because it wipes out most unsecured debts (like credit cards and medical bills) quickly—usually within 3 to 6 months. But what happens to your car?

In Chapter 7, the fate of your vehicle depends on three main factors: equity, whether you’re current on payments, and your willingness to reaffirm the debt.

Reaffirmation Agreements: The Most Common Path

If you have a car loan and want to keep the vehicle, you’ll likely need to sign a reaffirmation agreement. This is a legally binding contract between you and the lender that removes the car loan from the bankruptcy discharge. In other words, you agree to keep making payments as if bankruptcy never happened.

Why would you do this? Because without reaffirmation, the lender can repossess the car—even after bankruptcy—since the debt still exists. Reaffirmation protects both parties: you keep the car, and the lender keeps its collateral.

To reaffirm, you must:
– Be current on payments (or catch up quickly)
– Show the court you can afford the monthly payments
– Sign the agreement before the discharge is granted

The court will review the agreement to ensure it’s in your best interest. If your income is too low or the payments too high, the judge may reject it. In that case, you might need to redeem the car or surrender it.

Redemption: Paying Off the Car in One Lump Sum

Redemption is a powerful but underused option in Chapter 7. It allows you to keep your car by paying the lender the current market value in a single payment—regardless of how much you owe.

For example, if your car is worth $7,000 but you owe $12,000, you can redeem it for $7,000. This wipes out the loan and gives you full ownership. However, redemption requires a lump-sum payment, which many people don’t have. Some turn to family, friends, or specialized redemption loans to make it work.

Redemption is most useful for older cars with low market value but high loan balances. It’s less common for newer vehicles, but still worth exploring.

Surrendering the Car: When It Makes Sense

Sometimes, the best financial move is to surrender the car. This might be the case if:
– You owe significantly more than the car is worth (“underwater” on the loan)
– The monthly payments are unaffordable
– You don’t need the car for work or essential travel

Surrendering the vehicle eliminates the debt (in most cases) and frees up income for other expenses. The lender will sell the car, and any remaining balance after the sale may be discharged in bankruptcy—unless it’s a recourse loan, where the lender can pursue you for the deficiency.

While losing your car is never ideal, it can be a smart step toward long-term financial health.

Chapter 13 Bankruptcy and Car Retention

Chapter 13 bankruptcy is often the better choice if you’re behind on car payments but want to keep your vehicle. Unlike Chapter 7, Chapter 13 doesn’t require you to liquidate assets. Instead, you propose a court-approved repayment plan that lasts 3 to 5 years.

Catching Up on Missed Payments

One of the biggest advantages of Chapter 13 is the ability to “cure” arrears on secured debts like car loans. If you’ve missed several payments, those past-due amounts can be rolled into your repayment plan and paid off over time. Meanwhile, you continue making regular monthly payments directly to the lender.

For example, if you’re $3,000 behind on your $400/month car payment, the $3,000 arrears can be included in your Chapter 13 plan. You’ll pay that amount in installments over 3–5 years, while staying current on new payments. This prevents repossession and gives you a realistic path to catching up.

“Cramdown” for Older Cars

Chapter 13 offers a unique benefit called a “cramdown” (or lien strip) for cars purchased more than 910 days (about 2.5 years) before filing. If the car’s value is less than what you owe, you can reduce the loan balance to the car’s current market value and pay that amount through your plan—plus interest.

For instance, if you owe $15,000 on a car worth $10,000 and the purchase was over 910 days ago, the court may allow you to “cram down” the loan to $10,000. The remaining $5,000 becomes unsecured debt, which may be discharged at the end of your plan.

Cramdowns can save thousands of dollars and lower your monthly payments, making Chapter 13 an attractive option for underwater car loans.

Keeping a Paid-Off Car in Chapter 13

If your car is fully paid off, Chapter 13 still protects it—as long as the equity is within your exemption limits. Since there’s no loan, you don’t need to make payments, but you must declare the car’s value in your bankruptcy filing. If the equity exceeds your exemption, the trustee could sell the car unless you pay the non-exempt amount through your plan.

However, many filers with paid-off cars find that their exemption covers the full value, especially for older vehicles. In that case, the car remains yours throughout and after the bankruptcy.

State-by-State Exemption Variations

Exemptions aren’t one-size-fits-all. Each state sets its own rules, and the differences can be dramatic. Some states offer generous vehicle exemptions, while others are quite limited.

For example:
– Texas: Offers a $30,000 vehicle exemption per person—one of the most generous in the country.
– Florida: Allows an unlimited vehicle exemption if the car is used for work or family transportation.
– California: Offers two exemption systems; one includes a $3,450 vehicle exemption, the other allows a $3,325 wildcard that can be applied to a car.
– New York: Provides a $4,825 vehicle exemption, with an additional $1,000 if the car is used for work.
– Ohio: Offers a $3,775 vehicle exemption.

These numbers change periodically, so always check the most current exemption amounts. Also, remember that some states require you to use their exemptions, while others let you choose between state and federal.

The federal vehicle exemption is currently $4,450, with a wildcard exemption of $1,475 that can be added to any asset. If your state allows federal exemptions, this might be a better option depending on your equity.

How to Find Your State’s Exemption

To determine your state’s vehicle exemption:
1. Visit the U.S. Courts website or your state’s official court site.
2. Search for “bankruptcy exemptions [your state].”
3. Review the current exemption amounts and rules.
4. Consult a local bankruptcy attorney for personalized advice.

Never assume your exemption amount—laws change, and mistakes can cost you your car.

Practical Tips to Keep Your Car During Bankruptcy

Keeping your car during bankruptcy requires planning, honesty, and smart financial moves. Here are practical tips to increase your chances of success:

1. Stay Current on Payments

The single best way to protect your car is to keep making payments. Even if you’re considering bankruptcy, falling behind increases the risk of repossession. Lenders can repossess your car before or during bankruptcy if you’re delinquent—unless you file and invoke the automatic stay.

The automatic stay stops most collection actions, including repossession, as soon as you file. But if you’re already behind, you’ll need a plan (like Chapter 13) to catch up.

2. Get a Professional Car Valuation

Don’t guess your car’s value. Use trusted sources like Kelley Blue Book (KBB), Edmunds, or NADA Guides to get a fair market estimate. The bankruptcy trustee will use this value to calculate equity, so accuracy is crucial.

If your car is in poor condition, consider getting a mechanic’s assessment—it could lower the appraised value and reduce your equity.

3. Consider Trading Down Before Filing

If your car has high equity and a large loan, consider trading it for a less expensive, paid-off vehicle before filing. This reduces your equity and makes it easier to protect the car under exemptions.

For example, trading a $20,000 car with a $15,000 loan for a $5,000 paid-off car reduces your equity from $5,000 to $5,000—but now it’s fully protected under most exemptions.

Just be cautious: transferring assets before bankruptcy can be seen as fraudulent if done to hide property. Always consult an attorney before making any major financial moves.

4. Work with a Bankruptcy Attorney

Bankruptcy law is complex, and mistakes can be costly. A qualified attorney can:
– Help you choose the right chapter
– Maximize your exemptions
– Negotiate reaffirmation or redemption
– Represent you in court

Many offer free consultations and payment plans. Don’t try to navigate this alone—your car and financial future are worth the investment.

5. Be Honest in Your Bankruptcy Forms

Full disclosure is required in bankruptcy. You must list all assets, debts, income, and expenses truthfully. Hiding a car or undervaluing it can lead to dismissal of your case, fines, or even criminal charges.

Honesty protects you and ensures a smoother process.

Common Misconceptions About Bankruptcy and Cars

There are many myths about bankruptcy that can cause unnecessary fear. Let’s clear up some of the most common misconceptions:

Myth: “I’ll lose my car no matter what.”

False. Most people who file bankruptcy keep their car, especially if it’s essential and has low equity. Exemptions, reaffirmation, and repayment plans are designed to help filers retain necessary assets.

Myth: “I can’t file if I have a car loan.”

Not true. Having a car loan doesn’t disqualify you from bankruptcy. In fact, many filers use bankruptcy to manage car debt, especially if they’re underwater or behind on payments.

Myth: “Reaffirmation means I’m not really getting a fresh start.”

Reaffirmation does mean you’re responsible for the car loan, but it also means you keep the vehicle. For many, that’s a fair trade-off. You still get relief from other debts, like credit cards and medical bills.

Myth: “Only rich people lose their cars in bankruptcy.”

Actually, it’s often the opposite. People with high equity in luxury vehicles are more at risk. Those with modest, paid-off cars are usually well-protected by exemptions.

Conclusion

So, can you file bankruptcy and keep your car? In most cases, yes. Bankruptcy is not a punishment—it’s a tool for financial recovery. The law recognizes that some assets, like your car, are essential for rebuilding your life.

Whether you file Chapter 7 or Chapter 13, understanding exemptions, equity, and your options is key. Reaffirmation, redemption, cramdowns, and repayment plans all offer pathways to keep your vehicle. And with the help of a skilled attorney, you can navigate the process with confidence.

Don’t let fear of losing your car stop you from seeking relief. Millions of people have used bankruptcy to regain control of their finances—and kept their wheels in the process. Take the first step, get informed, and take back your future.

Frequently Asked Questions

Can I keep my car if I file Chapter 7 bankruptcy?

Yes, in most cases you can keep your car in Chapter 7 if the equity is protected by your state or federal exemption. You may need to sign a reaffirmation agreement or redeem the vehicle if you have a loan.

What happens if I’m behind on car payments when I file bankruptcy?

If you’re behind, Chapter 13 bankruptcy allows you to catch up on missed payments over 3–5 years. In Chapter 7, you may lose the car unless you can reaffirm the debt and bring payments current.

Can I keep a paid-off car in bankruptcy?

Yes, as long as the car’s equity doesn’t exceed your vehicle exemption. If it does, the trustee may sell the car unless you pay the non-exempt amount.

Do I have to surrender my car if I file bankruptcy?

No, surrendering the car is optional. Most people keep their vehicle by using exemptions, reaffirming the loan, or including it in a Chapter 13 repayment plan.

Can I buy a new car after filing bankruptcy?

Yes, but it may be difficult to get approved for financing immediately after discharge. Some lenders specialize in post-bankruptcy auto loans, often at higher interest rates.

Will bankruptcy stop my car from being repossessed?

Yes, filing bankruptcy triggers an automatic stay that stops repossession. However, if you don’t reaffirm the debt or catch up on payments, the lender can eventually repossess the car after the stay is lifted.