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 |
Chapter 13 catch-up example: 3 months behind, $450/month payment:
| Item | Amount |
|---|---|
| Monthly car payment | $450 |
| Arrears ($1,350) spread over 60 months | $22.50/month |
| Total monthly in plan | $472.50 |
The Bottom Line
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.
Related: What Happens When You File for Bankruptcy? | What Happens to Your House in Bankruptcy? | What Happens If Your Car Is Repossessed?