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Can You Keep Your Car If You File Bankruptcy?

Petition For Bankruptcy File
When many people start thinking about bankruptcy, people wonder if they get to keep essential assets such as their cars and their homes. Generally, you do get to keep these items, but exceptions exist based on the type of bankruptcy you file. Here's what you need to know.

Chapter 7: Liquidation Bankruptcy

Called liquidation, Chapter 7 bankruptcy requires you to sell your non-essential assets and pay the funds to your creditors. You are allowed to keep essential assets, but the exact rules vary based on your state. For instance, in California, you can keep a car with equity worth up to $3,050.
Note that this refers to the equity in your car, not its value. If your car is worth more than that amount, you may be able to keep it if you're still making payments on it.
To explain, imagine that you have a car worth $10,000, but you owe $9,000. In this case, your equity is $1,000 which is beneath the threshold. As long as you can afford to keep making payments, you can probably keep the car. If you're filing bankruptcy as a couple, the exemption doubles.

Chapter 13: The Wage Earner's Bankruptcy

With Chapter 13 bankruptcy, you get to keep the majority of your assets, but you have to make payments to your creditors over a three- or five-year period. Because you need income to cover your payments, Chapter 13 is frequently called the wage earner's bankruptcy. This type of bankruptcy also uses exemptions, but you don't necessarily have to get rid of cars that are over the exemptions.
When setting up your payment plan, your trustee will look at the value of non-exempt assets you keep, and the trustee will make sure that the value of those goods is reflected in your payment plan. As a result, the more valuable the cars you keep are, the higher your payments will be. Note, however, if you have an excessive amount of assets, your creditors may reject your payment plan.
Additionally, if you have luxury cars, your trustee may request that you sell those vehicles and downgrade to something more cost-effective. That helps to show that you are serious about getting your finances under control.

Bankruptcy When You're Behind on Your Payments

If you're behind on your car payments, your lender may eventually decide to repossess your car. Luckily, if you file bankruptcy before your lender starts that process, they won't be able to move forward. Whether you choose Chapter 7 or Chapter 13 bankruptcy, the court issues a stay as soon as they receive the paperwork.
The stay prevents anyone from taking collection activities on your accounts. That includes putting liens on your assets or repossessing your vehicle. During the bankruptcy process, you are protected from the typical debt collection you’ve probably been dealing with.
At this point, if your creditors want to move forward with repossession, they have to request permission from the courts. In most cases, however, your creditors prefer to work with you. They make money when you pay the interest on your loans, so the creditors want you to keep paying. Because of that, you may be able to negotiate your payments and get back on track.
Bankruptcy can be confusing, but we can help. To learn more about the process and to get help deciding if which type of bankruptcy is right for your situation, contact us today. At The Law Office of Cowan & Brady, we offer a free initial consultation. If you're overwhelmed with debt, we would love to work with you and provide shelter from the financial storm.