How to File for Bankruptcy and Keep Your Car
Summary:
- In most cases, you’ll be able to keep your car when you file bankruptcy. Both Chapter 7 and Chapter 13 have protections for vehicles.
- The bigger question is whether keeping your current car makes sense. Hanging on to a bad car loan with high interest rates or negative equity (or keeping a car that is constantly in the shop) can cost you more than it’s worth.
- Most people are surprised to learn that bankruptcy can be one of the best times to surrender a car that is problematic and get into a better car. In this article, we’ll show you how.
Concerns about transportation are among the biggest barriers to declaring bankruptcy. Here’s the good news: in most cases, you can keep your car whether you file Chapter 7 or Chapter 13. But here’s the better news: even though you can probably keep your car, you may not want to. In fact, for many people, replacing a bad car loan during bankruptcy is one of the smartest financial decisions they’ll ever make. In this article, then, we’ll take a look at how to file for bankruptcy and keep your car, but we’ll also take a look at your other options.
How Can I File for Bankruptcy and Keep My Car?
Before we dig into why you might want to replace your car, let’s quickly address the question at the heart of this article: how can you file for bankruptcy and keep your car?
Here’s the short answer: both Chapter 7 and Chapter 13 have ways for you to keep your car, but the details depend on how much equity you have in it.
So yes, you can usually keep your car when you file bankruptcy. But the more important question might be: should you?
Why Keeping Your Car Might Not Be the Best Option
Before you move forward with how to file for bankruptcy and keep your car, it’s worth asking whether that’s the best move for your financial recovery.
Most people filing for bankruptcy are already under intense financial pressure. They’ve fallen behind on payments, drained their savings, and made impossible trade-offs just to get by. And when money is tight, routine car maintenance is one of the first things to go.
That means by the time you file bankruptcy, your vehicle might have:
-
- Missed oil changes
- Bald tires
- Delayed repairs
- A loan with sky-high interest
- Negative equity (you owe more than the car is worth)
But even if you love your car and have taken great care of it, it may not be worth keeping. In many cases, people end up reaffirming their car loan without fully understanding the long-term consequences, so let’s take a look at reaffirmation.
What Is Reaffirming Debt?
Reaffirming debt during bankruptcy means you agree to remain legally responsible for a debt even after your bankruptcy is complete. In other words, you’re choosing not to include an otherwise dischargeable debt in your bankruptcy. If you reaffirm your car loan, you get to keep the car, but it also means you’re stuck with the original loan terms, even if they’re terrible.
Reaffirming a bad loan or trying to keep a car that’s falling apart can cost you more in the long run. You’ll be locked into paying for a vehicle that may already have high mileage, mechanical issues, or negative equity. And to make matters worse, reaffirmed debts often don’t report to the credit bureaus, so making those payments won’t even help you rebuild your credit score.
Are you thinking about buying a car during bankruptcy? Meet with a lender who understands the process.
Why Chapter 7 Bankruptcy Is the Perfect Time to Replace Your Car
When you file Chapter 7, your debt-to-income ratio improves almost instantly. That makes you more appealing to lenders, especially those that understand bankruptcy. And because you can’t file Chapter 7 again for another eight years, lenders know you’re a lower risk.
Now, will it be the car of your dreams? Maybe not. But it will likely be reliable, affordable, and a much better deal than continuing to throw money at a car that’s falling apart. And more importantly, it sets you up to qualify for something better down the road, once your credit is fully rebuilt.
Bankruptcy resets your financial profile. And that creates a short window where replacing your car is easier than you might expect.
What If You’re in Chapter 13?
If you’re filing Chapter 13, you’re not out of luck. Many people researching how to file for bankruptcy and keep your car are surprised to learn that Chapter 13 gives you more flexibility in some cases. Not only can you keep your car in a Chapter 13, but you can also buy a new car. The process looks like this:
- You find a vehicle that fits your budget.
- Your attorney submits the proposed financing to your trustee.
- The trustee approves a monthly payment and interest rate.
- Financing is finalized, and your car is delivered.
Watch & Learn: How to Buy a Car During Chapter 13
The Smart Way to Replace a Car During Bankruptcy
For many people, replacing a car during bankruptcy feels overwhelming, so it helps to work with a dealership that specializes in providing cars to people who have been through bankruptcy. Some, like Ash Auto Group (which has an online dealership), focus exclusively on helping people in bankruptcy find reliable vehicles, secure financing, and navigate the legal process alongside their attorney and trustee. These dealerships understand the court approval process for Chapter 13 cases, offer warranties and gap insurance, and report on-time payments to help rebuild your credit.
How to Buy a Car During Chapter 7 Bankruptcy
Why You Shouldn’t Keep a Car That’s Holding You Back
Let’s be honest: if you’re filing bankruptcy, your car might be part of the problem. Maybe it has repairs you can’t afford. Maybe you’re paying 20%-plus interest. Maybe you owe thousands more than the car is worth.
Even if your initial goal was to figure out how to file for bankruptcy and keep your car, bankruptcy can open the door to smarter options. You’re already doing the hard work of resetting your finances. Don’t drag an old problem into your new chapter.
Replacing your car during bankruptcy might not be what you expected, but for many people, it’s the key to getting back on track. You get transportation that works, payments that fit, and a chance to start rebuilding credit immediately.
Are you thinking about buying a car during bankruptcy? Meet with a lender who understands the process.
Frequently Asked Questions
- Can I really get approved for a car loan while my bankruptcy is still active?
- How does the court decide if I’m allowed to buy a car during bankruptcy?
- What down payment will I need if I’m financing a car during bankruptcy?
- Will the loan terms on a car loan be worse if I’m in bankruptcy?
- Is there a difference between Chapter 7 and Chapter 13 when it comes to new car loans?
- Will financing a car during bankruptcy help my credit score?
FAQ: Can I really get approved for a car loan while my bankruptcy is still active?
Yes, you can get approved for a car loan during an active bankruptcy in both Chapter 7 and Chapter 13. If you have filed Chapter 7, you can qualify right after your case has been filed. If you have filed Chapter 13, you can qualify once your bankruptcy has been confirmed, though you will need your trustee to sign off on the car purchase.
| Details | Chapter 7 | Chapter 13 |
| Who approves the funding? | Lender only | Trustee or court signs off first |
| Typical path to approval |
|
|
| Speed | Fast. Many people drive within days of filing if the numbers work. | Slower. Timing depends on the district and how quickly the approval letter is issued. |
| Common pitfalls | Picking a car that strains the budget. | Taking a loan before trustee or court approval. |
In any case, here is what lenders look for before approving a car loan during a bankruptcy:
- Ability to pay. Reliable income and a payment that fits your budget.
- Reasonable vehicle choice. Two to three years old, around average mileage, warranty and gap coverage preferred.
- Clean recent banking. Fewer overdrafts and no new unpaid obligations.
- Process compliance in Chapter 13. Do not take a loan until the trustee or court signs off.
You can improve your odds by:
- Getting prequalified with a bankruptcy-focused lender or dealership.
- Asking your attorney early so the motion or trustee letter is ready.
- Bringing a small down payment if you can, and avoiding rolling negative equity from a trade-in.
- Confirming the lender reports to all three bureaus so on-time payments help rebuild your credit.
FAQ: How does the court decide if I’m allowed to buy a car during bankruptcy?
For Chapter 13, you need written permission from the trustee or court before you take the loan. For Chapter 7, no court approval is necessary. If you are in a Chapter 13 bankruptcy and want to buy a car, ask your attorney to submit a short motion or trustee request with the car price, maximum payment, and interest cap, and approval is based on necessity and affordability.
The trustee or judge will check two things: necessity and affordability. If the car is essential for work or family logistics and the payment fits your confirmed plan, approval is typical. Do not sign anything until that approval letter or order is in hand.
FAQ: What down payment will I need if I’m financing a car during bankruptcy?
The downpayment on a car you buy during bankruptcy will vary by lender, income, and your budget. If you are in a Chapter 13 bankruptcy, expect your attorney and the trustee to focus on whether the proposed payment fits the plan. If you are in a Chapter 7 bankruptcy, your down payment will depend on your lender’s requirements. Be sure to work with a dealership that understands the process of buying a car during bankruptcy.
FAQ: Will the loan terms on a car loan be worse if I’m in bankruptcy?
Not always. Buyers working with bankruptcy-savvy lenders often land rates better than traditional subprime or buy-here-pay-here offers. The CFPB’s research shows average subprime rates at banks are around 10 percent compared with 15 to 20 percent at finance companies and buy-here-pay-here lots. Your case, income, and vehicle choice will drive the final offer.
FAQ: Is there a difference between Chapter 7 and Chapter 13 when it comes to new car loans?
Yes, with Chapter 7, the lender can approve you for a car loan after you file, but with Chapter 13, you will need the trustee or court to sign off on a new car loan.
| Details | Chapter 7 | Chapter 13 |
| Buying a new car during the case | Often possible once the case is filed if you qualify with a lender. | Requires trustee or court approval before you take on the loan. |
| Keeping your current car | Usually through reaffirmation with the lender, or give up the car. | You can restructure secured debts and pay through the plan. |
| Reducing what you owe on the car | Some debtors use redemption by paying value in a lump sum. Reaffirmation can keep terms the same. | Cramdown may reduce the secured balance to the car’s value in some cases. (“Cramdown” means that the courts allow you to reduce your car loan to the car’s current market value, with any extra balance treated as unsecured debt.) |
| Who signs off | No trustee approval needed to incur new debt, but lender approval and your budget still matter. | Trustee or judge approves payment and rate before the lender funds. |
FAQ: Will financing a car during bankruptcy help my credit score?
Yes, financing a car during bankruptcy can help your credit score when three things line up: 1) The lender reports to all three bureaus, 2) you make every payment on time, and 3) the loan amount and term fit your budget so you never miss a payment.
Financing a car during bankruptcy helps build credit because your payment history is the biggest factor in determining your credit score. On-time installment payments are one of the strongest positive signals in modern scoring models.
That said, if you kept your old car in Chapter 7 without reaffirming the debt, those payments often are not reported to the credit bureaus. A new loan that reports your payments to Experian, Equifax, and TransUnion creates a clean, positive trade line.
To make sure that your payments are reporting to the credit bureaus:
- Ask the dealer which bureaus they report to and how quickly the new tradeline posts.
- Choose a term that keeps the payment comfortable. A slightly longer term that you can pay early is safer than a short term that risks a miss.
- Enroll in autopay on day one and keep one month of payments in your checking account as a buffer.
- Keep credit card utilization under 30 percent, pay every bill on time, and avoid new collections.
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