Short answer: Probably.
Longer answer: Probably, but it can be a good idea to give the car up!
In Utah (and this depends entirely on where you file), each person filing a bankruptcy case can exempt $2,500 in value in one vehicle. So, if you own your car outright and it’s worth $2,500 or less (in practice, about $3,000 or less), the car is exempt, the bankruptcy trustee can’t take it, and yes, you can keep your car. This applies to couples filing a joint case, too, so where there are two cars owned outright worth less than the applicable amount, both are safe. And, in the case of a joint filing, each spouse can exempt $2,500 in a jointly-owned vehicle, so a car worth $5,000 or so would be safe.
Now, a Chapter 7 case also affords a perfect opportunity to get out from under a vehicle loan that is upside down (you owe more than the car is reasonably worth), so it’s always a good idea to give careful thought to whether it would be better to surrender that car to the creditor and start over with a less expensive one. Also, in Chapter 7, it is possible to “redeem” a car, by arranging for a new loan in the amount of the current fair market value of the car and asking the court to approve your proposal to pay the old lender that lower amount in exchange for the title, which would then list the new lender as the lienholder. Whether redemption is a good idea depends on the condition of the vehicle and the interest rate and other terms of the new loan.
If the car is not worth more than about $2,500 more than is owed on it, you can also be assured of keeping the car by “reaffirming” the debt (agreeing to be liable on the debt despite having filed bankruptcy) with the current lender. This can, but doesn’t necessarily, involve changing the terms of the loan, but usually the original terms (including amount owed, interest rate, and monthly payment) are maintained.
In Chapter 13, you can keep your car(s) even if there is more than the exemption amount (again, $2,500 in Utah) of equity, but the amount of equity above the exemption amount must be paid to creditors over the term of the Chapter 13 plan. This is usually not a problem, though, as in many cases the excess equity will go to pay your attorney’s fees.
Also in Chapter 13, the effective amount of the monthly car payment can often be substantially reduced by increasing the remaining months on the loan, reducing the interest rate, and (unless the loan was obtained less than 910 days before the bankruptcy case is filed) by “cramming down” the loan by splitting it into a “secured” portion (the current value of the car) which is paid in full, and an “unsecured” portion which is often paid very little.
So, yes, you can usually keep your car if you file for bankruptcy, and you can get rid of it, too, if that’s going to work out better in the long run. As with all of the matters covered on this site, the above barely scratches the surface of all of the possibilities, but hopefully gives you some idea of the basics.
Thanks for your time and interest!
Mark R. Emmett
Utah Bankruptcy Attorney and Advocate Since 1978!
Mark R. Emmett, Esq.
mremmett @ gmail.com
716 East 4500 South N240
Murray, Utah 84107-3619
801-438-4050
