Can You Keep Your Car in Chapter 7 Bankruptcy?

Many people who file Chapter 7 keep their car. If you’re current on payments and your car’s value is covered by an exemption, you can likely keep it. Some filers also choose to keep their car by redeeming the loan or reaffirming it. What’s possible depends on your state’s laws and your specific situation.

Can You Keep Your Car in Chapter 7 Bankruptcy?

Many people keep their car and file bankruptcy successfully. Whether you can keep your car depends on three main factors:

• Whether your car is financed or owned outright
• What exemptions you use in your bankruptcy case
• The type of bankruptcy you file

Bankruptcy exemptions are legal rules that determine what property you’re allowed to keep. Most states and the federal exemption system include a motor vehicle exemption. This protects some or all of your car’s value.

As of 2025, the federal motor vehicle exemption is $5,025. This amount will increase again in 2028.

If you own your car outright, the exemption needs to cover the car’s fair market value. If you’re still paying off a loan, the exemption needs to cover your equity. We break this down below.

Key Concepts: Equity and Exemptions Explained

Before we cover how to keep your car, understand two key ideas. Equity and exemptions apply in most situations.

What Is Equity?

Your vehicle equity is how much of your car’s value you actually own. To figure out your equity, subtract what you owe from the current fair market value. If you own your car outright, your equity is the car’s full value.

Fair market value is what your car would sell for today. It’s based on condition, mileage, and other factors, not what you originally paid. You can look up your vehicle’s value on websites like Kelley Blue Book or Edmunds.

What Are Bankruptcy Exemptions?

Exemptions are legal protections that let you keep certain property, like your car. You claim exemptions in Schedule C, which is an official form in your bankruptcy petition.

Each state and the federal government has its own list of exemptions with dollar limits. Most states include a motor vehicle exemption that covers some or all of your car’s value.

You might also be able to use a wildcard exemption to protect extra value. A wildcard exemption is flexible and can cover any type of property.

If your equity is less than or equal to the exemption amount, you can likely keep your car.

How To Keep a Paid-Off Car in Chapter 7 Bankruptcy

If you own your car outright, there’s a good chance you’ll keep it. The key is whether your car’s value is protected by the motor vehicle exemption you use.

Here are the three steps to figuring this out.

Step 1: Find Your Car’s Fair Market Value

Your car’s fair market value is what it would sell for today. It’s based on its condition, mileage, and location. It’s not what you originally paid or what you think it should be worth.

You can get a fair estimate by entering your car’s details on sites like Kelley Blue Book or Edmunds.

Step 2: Compare That Value to Your Available Exemption

The motor vehicle exemption is a legal protection that lets you keep value in your car. Most states offer this protection. The federal exemption currently allows you to protect up to $5,025 for a vehicle.

If your car’s value is less than or equal to your exemption amount, you can keep it.

For example, if your car is worth $3,800 and you’re using the $5,025 federal exemption, your car is fully protected.

Step 3: Use a Wildcard Exemption if Needed

If your car’s value is slightly more than your motor vehicle exemption, you might still protect it. You can use a wildcard exemption. It’s a flexible exemption that can protect any type of property, including extra value in your car.

For example, say your car is worth $6,500. If your motor vehicle exemption covers $5,000 and you have at least $1,500 available under your wildcard exemption, you can protect the full value.

What Happens If Your Car Isn’t Fully Protected?

If your car’s value exceeds your available exemptions, the bankruptcy trustee might sell it. If that happens, you’ll receive the exemption amount in cash. The rest of the proceeds go toward paying your creditors.

But this isn’t common for paid-off cars, especially if the car is older.

How To Keep a Car With a Loan in Chapter 7 Bankruptcy

If you’re still making payments on your car, you have a secured loan. A secured loan is tied to property. In this case, your car.

In Chapter 7 bankruptcy, you can get rid of many unsecured debts like credit cards and medical bills. But you can’t keep your car and erase the loan at the same time.

Many people who are current on car loan payments and whose equity is protected can keep their car. We’ll walk through how to determine whether your car is protected. Then we’ll explain your options in more detail.

Start by calculating the equity.

Step 1: Calculate Your Equity

First, figure out how much equity you have in the car. Here’s how:

• Look up your car’s fair market value based on condition, mileage, and age
• Subtract the remaining loan balance
• The result is your equity, the portion of value you actually own

For example, if your car is worth $10,000 and you owe $7,000, your equity is $3,000.

Step 2: Check Your Exemptions

Once you know your equity, see if it’s protected by a bankruptcy exemption. Most states and the federal set of exemptions have a motor vehicle exemption. It lets you keep a certain amount of value in a car.

If your equity is less than or equal to the exemption, the bankruptcy trustee can’t take your car. You must claim it correctly on Schedule C.

If your equity is fully protected, you can move on to choosing how to handle the loan.

If it’s not protected, the trustee could sell the car to repay creditors. This isn’t very common in Chapter 7, especially if your car is newer or you still owe a lot.

Step 3: Choose What To Do Next

Once you know your equity is covered, you’ll usually need to make a choice. You can:

• Reaffirm the loan: Agree to keep the car and continue making payments
• Redeem the car: Pay the lender the car’s current value in a lump sum and own it outright
• Surrender the car: Give the car back to the lender because it’s no longer affordable or worth keeping

Each option has important considerations. Here’s what you need to know.

Reaffirm the Loan

Reaffirming the loan means you sign an agreement to keep the car. You continue making monthly payments just like before filing for bankruptcy.

This can be a good choice if:

• You’re current on payments
• You need the car for work or family
• You’re confident you can afford the payments going forward

Some lenders require filers to sign a reaffirmation agreement.

Keep in mind: If you reaffirm the loan then fall behind on payments, the lender can repossess the car. You’ll lose the car and may still owe a deficiency balance.

Make sure this fits your long-term budget before you reaffirm.

If you were already behind on payments when you filed, reaffirming may be risky. In some cases, the only thing stopping repossession is the temporary pause created by your bankruptcy filing. It’s called the automatic stay.

Redeem the Car

Redeeming the car means you pay its current fair market value in a single lump sum. You pay this regardless of how much you owe on the loan. Once you pay that amount, the lender releases the lien. The car is yours, free and clear.

This option can make sense if:

• You owe more than the car is worth
• You have or can borrow enough money to pay the lump sum

If a lump-sum payment isn’t realistic, reaffirming or surrendering may be better options.

Surrender the Car

Surrendering the car means you give it back to the lender. The rest of the loan is wiped out in your bankruptcy discharge.

This can be a smart move if:

• The car payments are too high
• The car isn’t worth what you owe
• You’re ready to walk away from the debt and start fresh

Surrendering lets you move on without a car loan weighing you down. It’s especially helpful if the vehicle no longer fits your needs or budget.

What Happens to a Leased Car in Chapter 7 Bankruptcy?

Leased vehicles are treated differently from cars you own or are financing. Filing for Chapter 7 bankruptcy doesn’t automatically mean you’ll lose your leased car.

During your bankruptcy, you can either:

Assume the lease by keeping the car and making the lease payments. Just keep making payments as you were before filing. This option may make sense if the car is reliable, affordable, and fits your lifestyle.

Reject the lease and return the car to the leasing company. If you do this, any remaining payments, fees, or penalties are wiped out. They’re included in your bankruptcy discharge. This option can help you get out of an expensive or unaffordable lease.

Want a deeper dive? Check out the Guide to Car Leases in Bankruptcy.

What Happens to Your Car in Chapter 13 Bankruptcy?

If you’re behind on car payments, Chapter 13 can give you time to catch up. You catch up through a 3-5 year repayment plan.

Chapter 13 bankruptcy often offers more flexibility than Chapter 7 when keeping your car. But it also comes with more complexity and a longer commitment.

If you want to keep your car, you’ll typically include your auto loan in your Chapter 13 repayment plan. You make one monthly payment to the bankruptcy trustee. The trustee then pays your creditors, including your car lender.

A Chapter 13 plan can help you:

• Avoid car repossession
• Catch up on missed payments
• Potentially reduce your interest rate or lower your loan balance through a cramdown process if the car is worth less than what you owe and certain requirements are met

Need help deciding if Chapter 7 or Chapter 13 is right for you? Speak with a bankruptcy attorney for free to explore your options and protect your car.