My clients are always concerned how Chapter 7 bankruptcy will affect their ability to keep their car. If you car is paid for, then its pretty simple, so long as the value of the car is less than the available exemptions, then you’ll be able to keep it. In Massachusetts, the exemption amount is $7,500 for one car, for each debtor. So, if you and a spouse each own a car, you can each use your own $7,500 exemption. If the car is worth more than $7,500, then we may still be able to help you keep your car, using other available exemptions.

However, if you are making payments on your car, it’s a little more complicated. First, we would have to determine how much equity you have in your car. The exemption amount will apply, just like if you owned the car outright, so if you owe $5,000 and the car is worth $10,000, then you can protect the $5,000 in equity you have in the car by claiming the $7,500 auto exemption. However, if you owe $5,000 and the car is worth $30,000, then chances are the car will be sold by the bankruptcy trustee. The trustee will then give you back your exemption amount, and then use the rest of the money to repay your creditors.

When you file your bankruptcy, you’ll need to decide whether you want to keep your car. If you don’t want to keep your car, its simple, you will stop making payments and you will notify the lender and the court that you wish to “surrender” the car. The lender will then make arrangements to retrieve the car and you will no longer have any obligations. However, if you chose to keep your car, and the equity in the car is less than the allowed exemption, then you will continue to make car payments. The bankruptcy technically will discharge the car note, but since the lender has a security interest in the car, the lender has a right to repossess the car if you stop making payments. Sometimes your lender will require that you “reaffirm” the car note; but this is usually not the case. In most cases, your lender will let you keep the car without entering into a reaffirmation agreement, by simply allowing you to continue to make the payments under the old agreement (this is called the ride-through option). If your lender has been accepting your payments, it’s a sign that you may be able to retain the vehicle and continue making payments without entering into a new reaffirmation agreement.

If you are leasing your car, you don’t own it, so your exemptions don’t come into consideration. With a lease, you can either reject the lease and return the car, or keep the car by assuming the lease.

For more information on how bankruptcy will affect your car, please feel free to contact us for a free consultation.