Can You Keep Your Car After Filing Bankruptcy in Texas?
Updated on 08 October 2024
Many people worry about how filing bankruptcy in Texas will affect their property, and one question that often comes up is, “can I keep my car?” Each state permits people who file for bankruptcy to save certain “exempt” assets when filing, including motor vehicles. In fact, Texas law allows your household to exempt the total value of one car per licensed driver, as well as for vehicles that non-licensed household members rely on for transportation.
Bankruptcy car loan. What exactly is this?
A bankruptcy car loan refers to the treatment of your car loan during bankruptcy. In Chapter 7, you can choose to reaffirm, redeem, or surrender the car. In Chapter 13, you can include the loan in your repayment plan, reduce the loan balance through a cramdown, or surrender the car.
Each option has its own benefits and rules, so it’s important to consider your financial situation and long-term needs. Working with a bankruptcy attorney will help ensure you make the best decision regarding your car loan during bankruptcy.
Can You Keep Your Car in Chapter 7 in Texas?
While Chapter 7 is known as a““liquidation”” bankruptcy that requires non-exempt assets to be sold to pay back your creditors, you cannot be forced to sell an exempt car against your wishes. The lender also cannot repossess your vehicle while your bankruptcy is in progress.
Because the debts you owe on your vehicles will be discharged during bankruptcy, you will technically not have to pay back the loan. However, if you stop making your payments after filing, the lender can (and will) repossess the car, and you will lose it.
Fortunately, you can keep your car after filing through reaffirmation or redemption. If you reaffirm the vehicle, you will essentially sign an agreement to continue paying back the remaining balance on your auto loan. If you choose to redeem instead, you can purchase it straight out by paying its current retail value in total. While this option can save you thousands if you owe more on your loan than your automobile is worth, it can be challenging for many people to come up with a large sum of money, so reaffirmation is usually the most popular option.
What Happens to Your Vehicle in Chapter 13?
After filing for Chapter 13 bankruptcy in Texas, you can keep your vehicle as long as you continue to pay for it. This means you can continue to make payments on your existing loan, or you can choose to include your auto loan in your 3-to-5 year repayment plan. If you include it in your plan, you may also be able to““cramdown”” the amount you owe on the vehicle by reducing your auto loan principal to the car’s fair market value and/or lowering your interest rate.
Comparing Chapter 7 and Chapter 13: Which Is Better For You?
When deciding between Chapter 7 and Chapter 13 bankruptcy, the best choice depends on your financial situation, the type of debt you have, and your long-term goals.
Chapter 7 bankruptcy eliminates most of your unsecured debts, such as credit card debt, medical bills, and personal loans. You may have to sell some non-exempt assets (though many people keep all or most of their property under state or federal exemption laws).
There are several benefits of Chapter 7 bankruptcy. Namely, most of your debts can be eliminated relatively quickly, usually taking three to six months to complete and unlike Chapter 13, there is no obligation to repay debts over time.
However, to qualify for Chapter 7, you must pass a means test, which examines your income compared to the median in your state. Chapter 7 bankruptcy is often best for people with low income and few assets, people primarily dealing with unsecured debt, and those looking for a fast resolution to overwhelming debt.
On the other hand, the primary benefits of Chapter 13 include keeping your car, home, or other assets as long as you can keep up with payments under the court-approved plan. Chapter 13 also allows you to catch up on secured debts like a mortgage or car loan if you're behind.
Chapter 13 stays on your credit report for seven years, but your credit could improve faster than with Chapter 7 if you stick to the repayment plan.
If you are unsure, consulting with an experienced bankruptcy attorney can help you weigh the pros and cons of each option based on your unique circumstances. Each type of bankruptcy offers different benefits and should be chosen based on your financial needs and goals.
Protecting Your Vehicle from Repossession During Bankruptcy
Protecting your vehicle from repossession during bankruptcy is a major concern for many people, especially if you rely on your car for work and daily life. Both Chapter 7 and Chapter 13 Bankruptcy can help save your vehicle.
Chapter 7 bankruptcy allows you to eliminate many types of unsecured debt. However, you must deal with your secured debts (like car loans) in specific ways to protect your vehicle from repossession.
When you file for Chapter 7, an automatic stay takes effect, which stops creditors from collecting debts, including repossession efforts. While the stay is in place, lenders cannot repossess your car without court approval.
Chapter 13 bankruptcy offers more flexibility in protecting your vehicle from repossession, as it involves a court-approved repayment plan. Chapter 13 allows you to catch up on missed car payments over three to five years, often reducing your monthly payments. In some cases, you can even reduce the interest rate on your car loan.
If you owe more on the vehicle than it's worth and you’ve had the car for at least 910 days, Chapter 13 may allow you to "cram down" the loan. This means you can reduce the loan balance to the current value of the car, paying only what the car is worth, not what you originally owed. The remaining balance of the loan is treated as unsecured debt and may be discharged after completing your Chapter 13 plan.
Similar to Chapter 7, filing for Chapter 13 triggers an automatic stay, which immediately stops any pending repossession actions. As long as you include your car loan in the repayment plan and keep up with the payments, your lender cannot repossess the vehicle.
If you’re facing repossession, filing either Chapter 7 or Chapter 13 can stop the repossession process immediately through the automatic stay.
Bankruptcy laws are complex, and an experienced bankruptcy attorney can help you navigate the process, especially if you want to protect your vehicle. They can help you understand whether reaffirmation, redemption, or a Chapter 13 repayment plan is the best option for your situation.
How to file for bankruptcy and keep your car?
There are several ways you can file for bankruptcy and keep your car. Your ability to keep the car will depend on several factors, such as the equity in the car, your ability to continue making payments, and the type of bankruptcy you file.
Chapter 7 bankruptcy involves liquidating non-exempt assets to pay off creditors, but many individuals can keep their car if certain conditions are met. If the car is worth less than or close to what you owe, or if its equity is covered by bankruptcy exemptions, you can likely keep it.
Bankruptcy law allows you to protect certain property using exemptions that can allow you to protect certain amounts of equity in your vehicle. Additionally, if you are current on your car payments and want to keep the car, you can sign a reaffirmation agreement with the lender. If your car is worth less than what you owe, you can redeem it in Chapter 7 by paying the lender the current market value of the car in a lump sum.
Chapter 13 bankruptcy allows you to create a repayment plan to pay off debts over three to five years, and it offers more flexibility to keep your car while catching up on missed payments.
In Chapter 13, you can include your car loan in the repayment plan, allowing you to catch up on missed payments and keep the car!
However, it’s important to note that even if bankruptcy allows you to keep the car, you must continue making the loan payments if you have a car loan. Failing to do so will allow the lender to repossess the car, even during bankruptcy.
Claiming bankruptcy and keeping your car. Is this possible?
Yes! Filing for bankruptcy doesn’t necessarily mean losing your car. By understanding how exemptions work and utilizing options like reaffirmation agreements, redemption, or including the car loan in a Chapter 13 repayment plan, you can keep your vehicle during bankruptcy. It's important to work with a bankruptcy attorney who can guide you through the process, protect your assets, and ensure you make the best financial decisions based on your unique situation.
Other Exemptions
Texas law exempts many other types of property. This ultimately allows many people to keep most, if not all, of what they own after filing. Some of these exemptions include:
- The entire value of your homestead (primary residence)
- Personal property including food, clothing, furniture, home goods, jewelry, firearms, and pets.
- Health savings accounts
- Most retirement accounts and pensions
- Insurance benefits
If you are considering filing for bankruptcy but are worried that you will lose your car or truck, call or text DebtStoppers in DFW Texas today at 469-646-0750 to discuss your concerns. You can schedule a free consultation with one of our knowledgeable Texas lawyers to review your financial situation and recommend which type of bankruptcy will help the most. And if saving your vehicle is important to you, we can work out a plan that allows you to find financial freedom while keeping your family on the road.
