Your Car and Bankruptcy: Key Insights

This blog post and accompanying YouTube video focus on filing for bankruptcy when a car loan is involved, especially regarding exemptions and being able to keep your vehicle. How exemptions and equity work are different for Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Equity in Your Car- Chapter 7 Bankruptcy versus Chapter 13

Your car’s equity is key in the bankruptcy process. Confirm the value and subtract the loan balance to confirm the equity amount. Usually, since cars depreciate in value so quickly, there’s little to no equity. Exemptions vary by state and protect a certain amount of equity.

For example, Florida recently increased its car exemption to $5,000. Suppose your car is worth $25,000 and you owe $10,000. That’s $15,000 in equity. From there, subtract the exemption of $5,000, leaving $10,000 as nonexempt equity.
If your car has negative equity, there’s no concern, as the bankruptcy trustee won’t want it.

Options in Chapter 7 Bankruptcy

If your car has nonexempt equity, you can buy back the nonexempt portion from the trustee. However, your time frame to do so would be limited to ten to twelve months maximum with Chapter 7. If you are unable to pay back the nonexempt equity with Chapter 7 bankruptcy, you might consider filing Chapter 13 bankruptcy to pay over 36 to 60 months.

Alternatively, you can surrender the car, which might be financially beneficial, especially if the car is overvalued or has issues such as high mileage or prior car accidents.

Negative Equity

Negative equity protects you since there’s nothing for the trustee to liquidate, so the exemption wouldn’t even apply. For this reason, most debtors can keep their cars when they file for bankruptcy.

Reaffirmation Agreements

If you are keeping your car, the bank may require a reaffirmation agreement, which confirms you will continue paying the loan. The loan terms usually remain unchanged, and the agreement excludes the car from bankruptcy.

• Creditor Scams with Reaffirmation Agreements

However, be cautious, as reaffirming debt can have long-term consequences if your financial situation worsens. For example, if you cannot make the car loan payments after your bankruptcy has been approved, if you surrender the car or it gets repossessed, the bank can come after you for the remaining loan balance.

Automatic Stay and Payments

The automatic stay in bankruptcy halts most lawsuits but can complicate secured debt payments like car loans. If you have a lawyer, the lender will speak to your bankruptcy attorney, but if you are self-represented, chances are they won’t, which complicates things unnecessarily.

Creditors may limit account access, especially online, making it harder to make payments. Sometimes creditors will allow payments by phone; if not, payments must be mailed. More importantly, ensure car and mortgage payments are up to date to avoid issues. If filing for Chapter 7 bankruptcy, your secured debt payments have to be current at the time of filing. Otherwise, you risk losing your car or home.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon Books. To access my YouTube channel, click this link.

Need to look for prior blog posts or other categories? Click the links below:

• Bankruptcy
• Insights & Analysis

Disclaimer: Please make sure always to seek advice from a qualified bankruptcy attorney, as this website should be used for informational and educational purposes only.

Updated on March 28, 2025.