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What happens to your car after you file for bankruptcy?

On Behalf of | Apr 17, 2024 | Personal Bankruptcy

Michigan residents who are thinking about filing Chapter 7 or Chapter 13 personal bankruptcy petitions often wonder if they will be able to keep their cars if they seek debt relief. In most cases, the answer to this question is likely to be yes. Every state has bankruptcy exemptions in place that protect personal property like motor vehicles when individuals file Chapter 7 bankruptcies, and secured debts like car loans are prioritized in Chapter 13 bankruptcies.

Bankruptcy exemptions

A Michigan resident who files a Chapter 7 personal bankruptcy can choose either federal or state bankruptcy exemptions as long as they have lived in the Wolverine State for at least two years. Michigan’s bankruptcy exemptions protect up to $4,250 in motor vehicle equity, but the federal exemptions protect up to $4,450 in equity. You can calculate your equity by deducting the balance of your car loan from your vehicle’s fair market value. You will only be able to protect your vehicle using a bankruptcy exemption if you are up-to-date on your auto loan payments.

Chapter 13 bankruptcies

Individuals who file Chapter 13 bankruptcies make monthly payments for three or five years to pay down their debts. Secured debts like car loans and mortgages are usually paid down first. This means that bankruptcy trustees usually allow individuals who file reorganization bankruptcies to keep their cars, and this is especially true when their vehicles provide transportation to and from work.

Bankruptcy myths

One of the myths surrounding bankruptcy is the belief that people who seek debt relief will be forced to liquidate personal assets like cars. This rarely happens because the federal government and every state have put bankruptcy exemptions in place to protect personal property.