Financing a car is one of the best options for people who need vehicles. However, much can change over the car loan term, and many people who use car financing may even consider filing for bankruptcy protection. The problem is many people don’t know what happens to their car when they file. Can you keep it, or are car owners forced to surrender their vehicles to undergo bankruptcy? 

What is bankruptcy?

According to the United States Courts, bankruptcy is a process that provides an option for people who can’t afford to pay their debts. Through bankruptcy, people can either liquidate their assets to pay off the debt or create a repayment plan. There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. However, going through bankruptcy can make it more challenging to finance a car. 

So, what is Chapter 7 bankruptcy? In a nutshell, people call this one the liquidation route. This means a court-appointed trustee will sell your nonexempt items to pay your debts. Exempt items would be things the person needs to live a regular life. Regarding Chapter 13, the court will reorganize your debts and create a repayment plan. This route can involve the court discharging some of the debt. 

What happens if you finance a car and then file for protection?

What happens to your car when you file for bankruptcy depends on a few things. Which route you take, do you own the vehicle outright, and how much it’s worth are all necessary questions. People have exemptions when filing for bankruptcy. Regarding your car, the federal exemption amount is $4,000. However, 31 states have their own exemption amounts that can be higher or lower. 

If your car is worth the same amount or less than the exemption, you can keep it. However, if it’s worth more, the courts will sell it off, give you the exemption amount to buy an appropriately priced car and use the difference to pay your debt. Readers should note that there is also a wildcard exemption that they can add in order to keep a vehicle they may not have been able to.

However, if you have decided to finance a car and are still making payments, it works a bit differently. In this process, the value of the car, minus how much you owe, is important. If your equity is lower than the exemption amount, you can keep the car. However, if the equity is higher, the bankruptcy trustee can sell it and give you an appropriate amount to get a different vehicle. 

Drivers who file Chapter 13 bankruptcy are more likely to be able to keep their vehicles. However, your specific financial profile will determine what happens to your car. Again, either option will make things like car financing more challenging, but only for a while.