Another way to keep your car in Chapter 7 bankruptcy

A common question when looking at filing for Chapter 7 bankruptcy is whether a debtor can keep their car. If the car has equity, then to keep the car it must be covered by an exemption. There is a specific exemption for a vehicle under Federal law, but one may also use any excess “wild card” exemption. The Federal exemption is at least $3,675.00 in equity (it goes up most years).

If the car has a secured loan against it then to keep it in a Chapter 7 one typically will have to reaffirm the debt. This means that the debtor will have to agree to remain personally liable on the loan as it existed when the bankruptcy was filed. Sometimes creditors will not insist on the reaffirmation so long as the loan is not past due and the debtor keeps making payments on time. However, many of these loans are for much more than the car is worth and have exceedingly high interest rates.

Another way to keep your car in the Chapter 7 is to file a Motion to Redeem Personal Property under 11 USC Sect. 722 of the bankruptcy code. Essentially, the debtor is moving to court to let them pay fair market value of the car in one lump sum as opposed to the full amount of the loan. If granted, then the creditor must release the lien on the car for the lump sum payment.

You may have enough exempted funds in a bank account to pay the lump sum, or you may have to seek a “722 loan” from another source.  Either way, this is a good option for a vehicle that is upside down on its loan or has a high interest rate.