Can You Keep Your Car If You File Chapter 7 Bankruptcy?
One of the first questions people ask when considering bankruptcy is whether they'll be able to keep their car.
For most people, a vehicle isn't a luxury. It's how they get to work, bring their children to school, attend medical appointments, and take care of everyday responsibilities.
I've spoken with people who were willing to consider filing bankruptcy but hesitated because they believed the bankruptcy trustee would automatically take their vehicle.
That's generally not how Chapter 7 works.
Many people who file Chapter 7 in Massachusetts are able to keep their cars. However, there are several issues that need to be reviewed before filing, particularly when the vehicle is financed.
First, Determine How Much Equity You Have
The starting point is the vehicle's value compared with the amount owed on the loan.
Suppose you own a 2020 Toyota Camry worth approximately $16,000.
You still owe $12,000 on the loan.
That means you have approximately $4,000 in equity.
Equity is simply the difference between what the vehicle is worth and what you owe.
If the car is worth $16,000 and you owe $18,000, you have no equity.
This distinction matters because a Chapter 7 trustee is primarily concerned with property that has value beyond any liens and available bankruptcy exemptions.
A vehicle with little or no equity generally presents a different situation from a vehicle worth $30,000 that is owned free and clear.
Massachusetts Provides Protection for Vehicle Equity
Massachusetts residents who meet the applicable requirements can generally choose between the Massachusetts bankruptcy exemptions and the federal bankruptcy exemptions.
Under Massachusetts General Laws Chapter 235, Section 34, an individual may generally exempt up to $7,500 of equity in one motor vehicle.
The exemption increases to $15,000 for a person who is disabled or who is 60 years of age or older.
The federal bankruptcy exemptions provide a separate motor-vehicle exemption, currently $5,025, along with a wildcard exemption that may protect additional equity when available.
These are alternatives, not exemptions that can simply be combined across the two systems.
For example, suppose your vehicle is worth $18,000 and you owe $13,000.
You have $5,000 in equity.
If you qualify to use the Massachusetts exemptions, that equity would ordinarily fall within the $7,500 motor-vehicle exemption.
However, the analysis can become more complicated when someone owns multiple vehicles, has substantial equity, or needs to protect other property.
The exemption decision should be made after reviewing all of the person's assets, not just the car.
What Happens If You Still Have a Car Loan?
This is where people sometimes become confused.
Filing Chapter 7 bankruptcy can eliminate your personal obligation to repay many debts, but it does not automatically eliminate a lender's lien against your vehicle.
In other words, the bankruptcy may discharge your personal liability on the car loan, but the lender generally retains its security interest in the vehicle.
If you stop making payments, the lender may eventually repossess the car, subject to applicable bankruptcy protections and state law.
If you want to keep the vehicle, you generally need to address the lender's secured claim.
For many people, that means continuing to make the regular monthly payments and considering whether to enter into a reaffirmation agreement.
What Is a Reaffirmation Agreement?
A reaffirmation agreement is an agreement between the debtor and a creditor under which the debtor agrees to remain personally responsible for a particular debt despite filing bankruptcy.
Suppose you owe $14,000 on your vehicle and have a monthly payment of $350.
If you sign an enforceable reaffirmation agreement, you agree to remain responsible for that loan under the agreement's terms.
You keep making the payments, and the lender retains its rights under the loan agreement.
The important point is that reaffirmation can restore personal liability for the debt.
If you later default and the lender repossesses the vehicle, you may still owe a deficiency balance after the vehicle is sold.
That is why I don't recommend signing a reaffirmation agreement without carefully considering the payment, the vehicle's value, and the client's financial circumstances.
Reaffirmation agreements must satisfy specific requirements under federal bankruptcy law, including applicable disclosure and filing requirements.
Can You Keep Paying Without Reaffirming?
Sometimes this is possible, but it should not be assumed.
Some lenders will accept continued payments without requiring a reaffirmation agreement and may allow the borrower to retain the vehicle as long as payments remain current.
This is sometimes referred to as a ride-through arrangement.
However, the Bankruptcy Code contains provisions addressing a debtor's obligations concerning secured personal property, including the requirement to state an intention regarding the vehicle and act on that intention within specified deadlines.
Those provisions can affect the protections available to someone who does not reaffirm or redeem the vehicle.
Consequently, whether a borrower can safely keep a financed vehicle without reaffirming depends on the circumstances, the lender, the loan documents, and applicable law.
I would not advise someone simply to ignore the reaffirmation paperwork and assume that making payments will always protect the car.
What If You Can No Longer Afford the Car Payment?
Sometimes the better decision is not to keep the vehicle.
Suppose someone has a car payment of $750 per month, owes $28,000, and the vehicle is worth only $19,000.
That person is paying a substantial amount each month on a vehicle with significant negative equity.
If the payment is making it difficult to afford housing, utilities, groceries, or other necessities, surrendering the vehicle through Chapter 7 may be worth considering.
In many cases, surrendering a financed vehicle in Chapter 7 allows the debtor to eliminate personal responsibility for the remaining loan balance, assuming the debt is dischargeable.
The lender can repossess and sell the vehicle, but the debtor generally will not remain personally responsible for a resulting deficiency if the debt has been discharged and has not been reaffirmed.
Of course, transportation still needs to be addressed.
Before recommending surrender, I would want to know whether the person has access to another vehicle, can purchase an affordable replacement, or has another reliable way to get to work.
What About a Car That Is Paid Off?
If you own your car outright, the primary issue is usually whether its equity is protected by the available exemptions.
A modestly valued vehicle may be fully protected.
A more expensive vehicle with substantial nonexempt equity could present a problem in Chapter 7.
For example, someone who owns a vehicle worth $25,000 free and clear may have equity exceeding the ordinary Massachusetts motor-vehicle exemption.
That doesn't automatically mean the trustee will take the car. Other exemptions, the costs of selling the vehicle, and the overall circumstances must be considered.
But it is an issue that should be evaluated before filing.
The Important Thing Is to Review the Vehicle Before Filing
Most people considering bankruptcy need dependable transportation, and keeping a vehicle is often entirely consistent with obtaining a Chapter 7 discharge.
The key is understanding the vehicle's value, the loan balance, the available exemptions, and whether the payments remain affordable.
At Common Law Associates, LLP, we review these issues before filing so clients understand their options and can make an informed decision about keeping or surrendering a vehicle.
Bankruptcy is intended to provide a fresh financial start. That decision should include a realistic plan for transportation after the case is completed.