Can you keep your car if you file for bankruptcy?

Many people in Connecticut who are struggling with overwhelming levels of debt hesitate to file for bankruptcy because they think that they will lose their cars and other assets if they file. However, people can choose between the state or federal bankruptcy exemptions to protect their vehicles in Chapter 7 bankruptcy. Since Chapter 13 bankruptcy involves a repayment plan instead of liquidating assets, people can also typically keep their cars when they file for protection under Chapter 13.

Chapter 7 bankruptcy and vehicles

When someone files for Chapter 7 bankruptcy, his or her non-exempt assets will be liquidated by the bankruptcy court to repay a portion of the debts. However, people can choose between state exemptions or federal exemptions to exempt certain assets from the bankruptcy estate.

Under Conn. Stat. sec. 952b, the state exemption for a personal vehicle is $3,500. The value of a vehicle is calculated as the fair market value of a car minus any outstanding motor vehicle loan. If the person has a loan on the vehicle, he or she can keep the vehicle by reaffirming the debt and continuing to make payments. If he or she does not owe any money on the vehicle, the vehicle can be exempted as long as it is worth less than the state’s exemption or the federal exemption.

Chapter 13 bankruptcy

If a debtor elects to file for Chapter 13 bankruptcy, he or she will propose a repayment plan that lasts between three and five years. The debtor can include a proposal for continuing to pay a car loan as a part of his or her repayment plan. The bankruptcy trustee might renegotiate the interest rate to make the payment lower. As long as the debtor keeps current with his or her payments, the vehicle should be safe.

Filing for protection in bankruptcy does not mean that a person will necessarily lose his or her vehicle. There are steps that people can take to save their cars from bankruptcy. A bankruptcy attorney may explain the differences between the federal and state exemptions in Chapter 7 bankruptcy and advise a debtor whether Chapter 7 or Chapter 13 makes more sense for them.