if I File Bankruptcy, What Happens To My Car?

Can You Keep Your Car in a Bankruptcy?

To answer that question, let’s take a look at the two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.

If I File Bankruptcy, What Happens to My Car in a Chapter 7?

Chapter 7 bankruptcy is known as liquidation. It’s a faster process than Chapter 13 bankruptcy (usually completed within six months), designed to wipe out most unsecured debts like credit cards and medical bills. You must meet income limits to qualify, and your non-exempt assets can be sold to repay creditors.

Whether you can keep your car depends on two main factors:

1. How much equity you have in the car
2. The bankruptcy exemptions in your state

Each state has a list of exemptions, also known as items you’re allowed to keep when you file. Most states include a vehicle exemption. If your car’s equity falls under that amount, you can keep it.

However, if your car has more equity than your state’s exemption allows, or if you’re behind on payments and can’t catch up, you may need to look at other options, like Chapter 13 or a vehicle replacement.

If I File Bankruptcy, What Happens to My Car in a Chapter 7?

If I File Bankruptcy, What Happens to My Car in a Chapter 13?

Chapter 13 is a reorganization plan that stretches over 3–5 years. It allows you to keep all your assets (even if they’re non-exempt) while you repay part of your debt over time. It’s a good option if you’re behind on car payments or have too much equity to be protected under Chapter 7 exemptions. As long as you can afford the payments under the plan, you can usually keep your car, and even catch up on missed payments gradually.

What If You’re Still Making Payments on the Car?

If you have a car loan and you’re current on your payments, you may be able to reaffirm the debt and keep the car. Reaffirmation means you agree to continue making payments on the loan after bankruptcy.

But here’s the problem: reaffirmed debts don’t always report to the credit bureaus. That means you could make every payment on time for years, and still get no credit for it.

From a credit rebuilding perspective, reaffirmation often offers little benefit, and here’s why: To rebuild your credit after bankruptcy, you’ll need three new credit cards and one installment account. If your reaffirmed loan doesn’t report to the credit bureaus, you’ll need to add another installment account to meet that requirement.

And if your car loan is upside down (meaning you owe more than the car is worth) reaffirmation can lock you into a bad deal. The surprising truth is that you might actually qualify for a better car during bankruptcy. In many cases, surrendering the vehicle and replacing it during bankruptcy is the smarter financial move.

How to Buy a Car During Chapter 7 Bankruptcy

Can You Really Buy a Car During Bankruptcy?

Yes, you can. In fact, it might be the smartest move you can make. Let’s take a look at how this works if you are in a Chapter 7 bankruptcy, as well as how it works if you are in a Chapter 13 bankruptcy.

Buying a New Car During a Chapter 7 Bankruptcy

Filing Chapter 7 wipes out most of your unsecured debts, like credit cards and medical bills. Once your case is officially filed with the court, your financial profile changes almost immediately. Lenders can now see that your existing debts are being discharged, which means your debt-to-income ratio (a major factor in loan approval decisions) improves significantly.

Because of this change, many lenders are willing to offer you a new auto loan even before your bankruptcy is finalized. This creates a short but powerful window where you’re more likely to qualify for better terms, lower payments, or a more reliable vehicle.

In short: Chapter 7 gives you a rare reset button, and for many people, that includes the chance to upgrade their car while starting fresh financially.

Buying a New Car During a Chapter 13 Bankruptcy

If you’re in Chapter 13, the process is a bit more complex, but still entirely possible. Because Chapter 13 involves a court-approved repayment plan, you’ll need permission from the court before taking on new debt, including a car loan.

Here’s how it generally works:

1. You identify a vehicle and proposed financing terms that fit your budget.
2. Your bankruptcy attorney submits this information to the trustee assigned to your case.
3. The trustee reviews the proposal and either files a motion with the court or approves it through an administrative process.
4. Once approved, the lender finalizes the financing, and you take possession of the vehicle.

This process ensures that the loan fits within your court-approved repayment plan and won’t jeopardize your ability to complete it.

How to Buy a Car DURING Chapter 13 Bankruptcy (and Where to Get It)

Final Thoughts: If I File Bankruptcy, What Happens to My Car—Really?

The truth is, filing bankruptcy gives you options, not restrictions. If you love your car and it falls within your exemption limits, you can likely keep it. If you’re stuck in a bad loan, you can walk away. And if your car is unreliable, or if you want a payment that actually helps rebuild your credit, you can get a better one.