Vehicle Exemption -- Can I Keep My Car?

Most people keep their vehicles in bankruptcy. The key question is whether your equity exceeds the exemption amount.

The Federal Vehicle Exemption

Under 11 U.S.C. Section 522(d)(2), you can exempt up to $4,450 in equity in one motor vehicle. This applies to cars, trucks, motorcycles, or any other motor vehicle.

Equity is the difference between what the vehicle is worth (fair market value, typically based on NADA or Kelley Blue Book private-party value) and what you owe on it. If you owe more than the vehicle is worth -- which is common, especially in the first few years of a car loan -- you have zero equity and the exemption is not even needed.

Example: No Equity (Underwater)

Vehicle value: $15,000. Loan balance: $18,000. Your equity: -$3,000 (negative).

Since you have no equity, the vehicle exemption does not matter. The trustee has no interest in a vehicle worth less than the loan.

Example: Equity Within Exemption

Vehicle value: $12,000. Loan balance: $8,000. Your equity: $4,000.

The federal exemption covers $4,450, so your $4,000 in equity is fully protected.

Example: Equity Exceeds Exemption

Vehicle value: $20,000. Owned free and clear. Your equity: $20,000.

The federal exemption only covers $4,450, leaving $15,550 non-exempt. You could use the wildcard exemption to cover some or all of the remaining equity.

State Vehicle Exemptions

State vehicle exemption amounts vary widely. Some examples:

In choice states, compare the federal and state vehicle exemptions. Many states also allow you to apply additional exemptions (like the wildcard) to boost your vehicle protection.

Your Three Options in Chapter 7

If you have a car loan and file Chapter 7, you generally have three choices under Section 521(a)(2):

1. Reaffirmation

You sign a reaffirmation agreement with the lender, agreeing to remain personally liable on the loan as if bankruptcy had not been filed. You keep the car and keep making payments. The debt survives the discharge. If you later default, the lender can repossess the car and sue you for any deficiency.

2. Redemption

Under Section 722, you can pay the lender the current fair market value of the vehicle in a single lump-sum payment and keep the car free and clear. This is advantageous when you owe significantly more than the car is worth, but coming up with the lump sum can be difficult. Some companies (like 722 Redemption Funding) offer loans specifically for this purpose.

3. Surrender

You return the vehicle to the lender. The remaining loan balance is discharged along with your other debts. This is the simplest option if you cannot afford the payments or do not need the vehicle.

Note: Some circuits allow a fourth option -- "retain and pay" -- where you simply continue making payments without signing a reaffirmation agreement. This gives you the flexibility to walk away later without personal liability. However, this approach is not available in all circuits, and some lenders will repossess if you do not formally reaffirm.

Vehicles in Chapter 13

Chapter 13 is generally more favorable for vehicle owners. You keep all your property and repay creditors through a 3-5 year plan. Two key advantages:

Cramdown

If your vehicle loan is more than 910 days old (about 2.5 years), you can "cram down" the loan to the vehicle's current fair market value under Section 1325(a). For example, if you owe $15,000 on a car worth $10,000, you can reduce the secured claim to $10,000 and treat the remaining $5,000 as unsecured debt. The 910-day rule (sometimes called the "hanging paragraph") prevents cramdown on recently purchased vehicles.

Interest Rate Reduction

Under the Supreme Court's decision in Till v. SCS Credit Corp. (2004), cramdown interest rates in Chapter 13 are calculated using the prime rate plus a risk adjustment -- typically 1-3%. If your original loan had a high interest rate (common for subprime borrowers), Chapter 13 can reduce it significantly.

The automatic stay also halts any repossession proceedings the moment you file Chapter 13. If your vehicle was recently repossessed, you may be able to recover it through the bankruptcy case if you act quickly.

Boosting Your Vehicle Exemption

If the vehicle exemption alone does not cover your equity, consider these strategies:

Legal References