Most people keep their car in bankruptcy. In Chapter 7, the motor vehicle exemption protects your equity. In Chapter 13, you can catch up on payments and may even reduce what you owe (cramdown). Surrender is always an option if the car is too expensive.
Chapter 7 vs. Chapter 13: Your Car
Factor
Chapter 7
Chapter 13
Keep your car?
If equity within exemption
Almost always
Behind on payments?
Must be current
Catch up through plan
Reduce loan balance?
Only through redemption (lump sum)
Cramdown (if loan 910+ days old)
Lower interest rate?
No
Yes (in cramdown)
Surrender option?
Yes
Yes
Vehicle Exemptions
Exemption Source
Amount per Vehicle
Federal exemption
$4,450
Federal wildcard (additional)
Up to $1,475 + unused homestead
California (System 1)
$3,725
California (System 2)
(use wildcard)
Texas
Current market value of 1 vehicle per licensed household member
Florida
$1,000 ($2,000 if no homestead claimed)
New York
$4,825
Illinois
$2,400
Ohio
$4,450
Georgia
$5,000
How Equity Is Calculated
Item
Amount
Car’s current market value (KBB/NADA)
$18,000
Minus: loan balance
-$14,000
Your equity
$4,000
If exemption is $4,450…
Result
Equity $4,000
✅ Exempt — keep the car
Equity $6,000
⚠️ $1,550 non-exempt; trustee may liquidate
Chapter 7: Three Options
Option
How It Works
Best When
Reaffirm
Sign new agreement to keep paying the loan
Can afford payments; want to keep the car
Redeem
Pay the car’s current value in one lump sum
Car worth less than loan balance
Surrender
Give back the car; remaining loan balance discharged
Can’t afford it or don’t need it
Redemption example: $14,000 loan balance, car worth $9,000:
Without Redemption
With Redemption
Pay $14,000 (full loan)
Pay $9,000 (current value)
—
Save $5,000
Redemption requires a lump-sum payment, but some lenders offer “redemption financing.”
Chapter 13: The Cramdown
Cramdown Requirement
Detail
Loan must be 910+ days old (~2.5 years)
Called the “910-day rule” or “hanging paragraph”
What it does
Reduces the secured claim to the car’s current value
Interest rate
Reduced to prime + 1-3%
Remaining balance
Treated as unsecured debt (often pennies on the dollar)
Cramdown example:
Without Cramdown
With Cramdown
Loan balance: $20,000
Secured claim: $12,000 (car value)
Interest rate: 9%
Interest rate: ~8% (prime +2%)
Monthly payment: $415
Monthly payment: $250
Total paid: $24,900
Total paid: $15,000
Savings: $0
Savings: ~$9,900
Behind on Car Payments?
Chapter
What Happens
Chapter 7
Must catch up immediately; can’t cure arrears through plan
Chapter 13
Automatic stay stops repossession; arrears spread over 3-5 years
Most people keep their car in bankruptcy. Chapter 7 lets you reaffirm the loan and keep paying, or redeem at current value. Chapter 13 is even better — automatic stay stops repossession, you catch up on missed payments over 3-5 years, and cramdown can reduce both the loan balance and interest rate. Surrender is always an option if the vehicle is too expensive for your budget.
WealthVieu researches and writes data-driven personal finance guides using primary sources including the IRS, Bureau of Labor Statistics, Federal Reserve, and Census Bureau.
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