Selling Your Car During Bankruptcy: What You Need to Know

When you file bankruptcy, your car becomes part of the bankruptcy estate. That means the trustee has legal authority over it until your case closes. Selling it without permission can get your case dismissed or worse.

But selling might make sense. Maybe you need cash for living expenses. Maybe the car payment is crushing you. Maybe the trustee is about to sell it anyway, and you found a better buyer. The question is not whether you can sell. The question is: What happens to the money?

How Equity Determines What Happens Next

Equity is the only number that matters. Take your car's fair market value—what a private buyer would pay,and subtract what you owe. That is your equity.

If your car is worth $12,000 and you owe $9,000, you have $3,000 in equity. If you owe $14,000 on a $12,000 car, you have zero equity. Simple math, massive consequences.

Bankruptcy exemptions protect a certain amount of equity. Federal exemptions protect $4,450 of car equity as of 2025. State exemptions vary wildly. California protects up to $3,325 under System 1 or $6,375 under System 2. Texas protects one vehicle per licensed household member with no dollar limit. Florida caps it at $1,000.

If your equity fits under your exemption, the trustee cannot touch it. If your equity exceeds your exemption, the trustee has a decision to make: sell the car to capture that value, or let you keep it if selling would cost more than it is worth.

Selling Your Car in Chapter 7

Chapter 7 lasts about four months. During that time, everything you own on your filing date is frozen. You cannot sell property without trustee approval. Period.

If your car has nonexempt equity, the trustee will either sell it themselves or allow you to sell it under their supervision. Once sold, the trustee pays off your car loan first. You get your exempt amount. Unsecured creditors get the rest.

Here is the math. Your car sells for $12,000. You owe $8,000. Your state exemption is $4,000. The trustee pays the lender $8,000, leaving $4,000. You get your $4,000 exemption. Nothing goes to creditors because there is nothing left. If the exemption were $2,000 instead, you would get $2,000 and creditors would get $2,000.

Some trustees let you buy back the nonexempt equity. If you have $2,000 in nonexempt value, the trustee might let you pay that amount over a few months to keep the car. Not all trustees offer this. Ask yours.

If your car is fully exempt and the trustee abandons it,meaning they officially give up any claim,you can sell it once the case closes. That usually takes 90 to 120 days. Once closed, you need no permission. The car is yours again.

Getting Trustee Approval to Sell

File a motion asking for permission. Include the buyer's offer, proof of your loan balance, and your exemption calculation. The trustee reviews it. If they approve, you proceed. If they object, the court decides.

Most trustees approve sales that generate cash for creditors or simplify the case. They reject sales that look like you are hiding money or gaming the system. If you already lined up a buyer at market value, approval usually comes fast.

Selling Your Car in Chapter 13

Chapter 13 is a three-to-five-year repayment plan. You keep your property, but you must pay unsecured creditors at least as much as they would have gotten in Chapter 7. That is the liquidation test.

If your car has $5,000 in nonexempt equity, your plan must pay unsecured creditors at least $5,000 over the life of the case. Selling the car does not erase that requirement. In fact, selling could make things worse.

When you sell during Chapter 13, the proceeds usually go to the trustee. They apply the money to your plan. If you were paying $300 per month for 60 months, the trustee might apply the sale proceeds and adjust your remaining payments. But the total amount owed to creditors rarely drops.

If you need to sell because you cannot afford the payment, the court might approve. If you want to sell to pocket cash, the court will not. The trustee and creditors can object if the sale looks like it benefits you more than them.

Replacing a Sold Car in Chapter 13

If you sell your car in Chapter 13, you will probably need another one. You must get trustee approval before financing a replacement. The court will want to see that the new loan fits your budget and does not derail your plan payments.

Some districts require a motion. Others allow informal approval. Expect scrutiny. If your plan is already tight, the trustee may reject the purchase or require you to modify your plan to account for the new payment.

What If the Trustee Sells Your Car First?

If the trustee moves to sell your car, you have options. You can pay the nonexempt equity in a lump sum or installments. You can convert your Chapter 7 to Chapter 13, which stops the sale and lets you keep the car by paying the equity through your plan. You can let the trustee sell it and move on.

Trustees rarely sell cars with minimal nonexempt equity. Selling costs money,towing, storage, auction fees. If your car has $800 in nonexempt equity, the trustee might abandon it because selling would net nothing after costs.

What Happens If You Sell Without Permission?

Selling your car without trustee approval is contempt of court. The trustee can demand the money back, seek sanctions, or move to dismiss your case. If you hid the money, that is fraud. Bankruptcy fraud is a federal crime carrying up to five years in prison.

Do not do it. Even if you think the car is exempt and the trustee will not care, you need permission. File the motion. Wait for approval. Protect yourself.

Practical Steps to Sell Your Car During Bankruptcy

Start by calculating equity. Get a written offer from a buyer or dealer. Pull your loan payoff statement. Check your state's exemption for vehicles.

Call or email the trustee's office. Some trustees have standard procedures posted on their website. Ask whether you need to file a motion or if informal approval works. File the motion if required. Attach the buyer's offer, payoff statement, and exemption worksheet.

Once approved, coordinate the sale with the trustee. The buyer usually pays the trustee directly, not you. The trustee disburses funds according to the court's order: lender first, your exemption next, creditors last.

If you are in Chapter 13 and need the proceeds to replace the car, say so in your motion. The court might allow you to keep enough to cover a down payment. But expect pushback unless you can prove the replacement is necessary and affordable.

When Waiting Makes More Sense

If your car is fully exempt and the trustee has not moved to sell it, waiting until discharge often simplifies everything. Once your Chapter 7 case closes, the car is yours again. No motions, no trustee approval, no risk of missteps.

Chapter 7 typically wraps up in four months. If you can hold off that long, you avoid complications. If you cannot,because you need cash now or the car is breaking down,then file the motion and sell with permission.

In Chapter 13, waiting three to five years is rarely practical. If you need to sell, do it early in the case so you have time to adjust your plan. Selling near the end of your plan creates confusion about final payments and discharge.

Questions to Ask Your Attorney

Does my state's exemption fully protect my car's equity? If not, how much is exposed?

Has the trustee abandoned my car, or is it still part of the estate?

If I sell, how long does it take to get my exempt portion?

Can I use sale proceeds to replace the car, or does everything go to creditors?

What happens to my Chapter 13 plan if I sell my car?

These answers depend on your district, your trustee, and your case facts. An attorney who practices in your local bankruptcy court will know.

If you are considering bankruptcy and unsure how your car fits into the picture, start by running through our bankruptcy screener. It walks you through the basics and helps you figure out whether filing makes sense in the first place.

The Bottom Line

You can sell your car during bankruptcy, but the trustee controls the process and the money. In Chapter 7, the trustee may sell it for you or let you sell it under supervision. In Chapter 13, selling can disrupt your repayment plan. Either way, get permission first. Selling without approval can sink your case.