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Will I Lose My Car if I Declare Bankruptcy?

speedometer reads bankrupt

If you are considering bankruptcy, you may worry that you will lose your car in the process.  Losing a car can create a difficult disruption in your life and your ability to continue generating income following the bankruptcy.  Luckily, filing for bankruptcy does not automatically mean giving up your car, even if you have outstanding car loans.  The bankruptcy code has provisions specifically for this type of personal property, depending on the type of bankruptcy and your circumstances.

If I File Bankruptcy What Happens to My Car?

In a Chapter 13 bankruptcy, your car loan can become part of your repayment plan

Chapter 13 bankruptcies involve re-organizing assets and income to create a payment plan.  If you are behind on your car payments, you may still be able to include your car loan as part of your Chapter 13 payment plan, if you can spread out and pay off the vehicle balance over three to five years.  This will forestall repossession of the car by allowing you to become current on your new plan.

In a Chapter 7 bankruptcy, you may be able to exempt your car from the asset sale

In a Chapter 7 bankruptcy, you are wiping clean all debt owed by selling off nonexempt assets rather than by creating a payment plan.  If you own your car outright, or if you are current on your car payments, you can take advantage of an exemption in the Chapter 7 rules.  Many states have a specific vehicle exemption for modest cars.  In Maryland, rather than a specific vehicle exemption, there is a “Wild Card Exemption” that applies to vehicles and other items.  The exemption applies only up to a certain amount. In Maryland, the Wild Card Exemption allows debtors to exempt up to $6,000 in cash or other property and up to $5,000 in personal property.  Both of these can be applied towards vehicles or other personal property, up to $11,000. 

If your car is worth more than the total exemption amount or the amount you allocate for the car, then the bankruptcy trustee could possibly sell your car and give you back the exemption amount.  If the exemption amount fully covers the value of your equity in the car, then the trustee will not sell it.  Exempting a car with a loan will not, however, automatically prevent the creditor from repossessing.  If you exempt a vehicle with a loan on it, assuming the car is used as collateral (as is typically the case), in order to avoid repossession you have two options:  Either redeem the vehicle from the lender by paying the outstanding balance (or the value of the car, whichever is lower), or reaffirm your loan with the lender.

Unfortunately, if you are behind on your payments and you file for Chapter 7 bankruptcy, you likely cannot keep your car unless you can bring your payments current before filing.

Notably, if you own the car outright and the exemption does not cover the car’s value, trustees will often let you “buy” the car.  Essentially, you would pay the amount the creditors would receive from the trustee’s sale of the car.    

If you’ve become overwhelmed with debt and need help finding a way out, contact a seasoned and knowledgeable Maryland consumer law and bankruptcy attorney at Haeger Law for a consultation, in Germantown at 888-463-3520.