“Will I keep the equity in my car if I file for bankruptcy?” This is one of the common questions people ask when they first walk into our office. They are worried about losing their vehicle — their way to get to work, drop the kids off at school, and keep their lives running. The short answer is: in most cases, yes, you can protect your car equity when you file for bankruptcy. But the full answer depends on which chapter you file and how much equity you have. Let me walk you through how this works.
What is vehicle equity and why does it matter?
Vehicle equity is the difference between what your vehicle is worth and what you still owe on it. If your car is worth $12,000 and you owe $8,000, you have $4,000 in equity. If you own the car outright, then the full value of the vehicle is your equity.
Equity matters in bankruptcy because it represents an asset, and in any bankruptcy case, the trustee is looking at what you own and what can be used to pay creditors. The good news is that Texas law gives you powerful tools to protect your vehicle – and your vehicle equity.
How Chapter 7 handles your car
Chapter 7 is known as a liquidation bankruptcy. In theory, a trustee could sell your non-exempt assets to pay your creditors. In practice, Texas exemptions are among the most generous in the country, and most people who file in Texas keep everything they own.
Texas allows you to use either the state exemptions or the federal exemptions – whichever set benefits you more. Under Texas state law, a motor vehicle is exempt for each licensed driver in the household. That means if you and your spouse both drive, you can each protect a vehicle. There is no specific dollar cap on the motor vehicle exemption under Texas law, which is a significant advantage for many of our clients.
If you are still making payments on the car, you have a choice. You can reaffirm the debt (essentially agreeing to remain personally liable on the loan in exchange for keeping the car) or you can surrender the vehicle if you no longer want it. Many of our clients choose to reaffirm when they are current on payments and want to hold onto a car they need.
How Chapter 13 handles your car
Chapter 13 is a reorganization bankruptcy. Instead of liquidating assets, you propose a three-to-five-year repayment plan that allows you to catch up on what you owe while protecting everything you own. This chapter is particularly powerful for people who have significant equity in a vehicle, are behind on payments, or are facing repossession.
In a Chapter 13 plan, you can catch up on missed car payments over time without losing the vehicle. You can also potentially reduce the amount you owe on the car through what is called a “cramdown,” where the loan balance is reduced to the current fair market value of the vehicle — provided the car loan is more than 910 days old at the time you file. For people who are deeply underwater on a high-interest auto loan, this can result in meaningful savings.
Chapter 13 also allows you to consolidate the car payment into your plan payment, often at a lower interest rate, which can make your monthly budget much more manageable.
Bankruptcy stops repossession in its tracks
One of the most immediate and powerful effects of filing for bankruptcy is the automatic stay. The moment your case is filed, federal law requires all collection activity to stop. That includes repossession.
If a creditor was about to send a tow truck, the automatic stay halts that process. If your car was already repossessed but the sale has not yet taken place, you may be able to get it back by filing quickly and demonstrating that you can protect and maintain the vehicle going forward. Time is critical in these situations, and acting fast makes all the difference.
Rubin & Associates can help protect your vehicle
Bankruptcy is not the end of the road for your financial situation or for your vehicle. Texas law is specifically designed to protect working people, and in most cases, our clients walk out of the bankruptcy process with their cars, their homes, and a clear path forward. The key is understanding which chapter fits your situation and acting before things get worse.
Every situation is different. The amount of equity you have, whether you are current on payments, whether you are facing repossession, and the overall picture of your finances all factor into the right strategy for you.
If you have questions about your car, your debt, or whether bankruptcy is the right step, call Rubin & Associates at 214-760-7777 today. We offer free consultations and have helped Dallas-area residents find relief for over 20 years. Do not wait until you are out of options — call us and find out exactly where you stand.