State Bankruptcy Exemptions

• Chapter 7 bankruptcy is also called liquidation bankruptcy since the court may sell some of your assets to help pay back your creditors. Since the court wants debtors to have a "fresh start" and not begin life after bankruptcy destitute, each state allows its residents to keep a certain amount of property. While provisions vary from state to state, many states offer a motor vehicle exemption for debtors up to a certain dollar amount. If you own your car outright and the value of your car is below your state's exemption level, you can keep your car after bankruptcy.
  
  

Reaffirmation

• If you have an outstanding loan against your car, you may lose it in bankruptcy even if the net equity is within your state's exemption limits. While a bankruptcy discharge can wipe out most if not all of your unsecured debt, lenders that have a secured interest in your property, such as a car loan, can still enforce a lien against your vehicle. If you sign an agreement with your car lender and continue to make payments on your car loan throughout your bankruptcy, the process is known as reaffirmation. As long as you make your payments on time, you can keep your car after bankruptcy. If, however, you ever default on the loan, your bankruptcy discharge will do you no good, as the reaffirmation agreement keeps your obligation to pay in place.
  
  

Redemption

• If you owe more on your car loan than your car is worth, you can use your bankruptcy discharge to help you keep your car. Through the process of redemption, if you pay your lender the secured value of your car loan, meaning the current value of your car, the additional amount of your car loan will be discharged in bankruptcy. As soon as you pay the lender the value of the car, the excess value of the loan is considered an unsecured debt, no longer a secured debt, and falls under the discharge provisions of bankruptcy. In essence, you are paying off your car loan through a combination of a cash payment and the bankruptcy discharge.
  
  

Chapter 13 Bankruptcy

• If you have fallen behind on your car payments but have a regular income, you can file Chapter 13 bankruptcy to help you keep the car. Chapter 13 is known as an individual debt adjustment because it allows debtors with regular income to make payments to the court on behalf of creditors. The amount of your car loan is categorized as a secured debt in your payment plan and some of your monthly payment to the court goes to the originator of your car loan.