When considering bankruptcy, most people want to know whether they can keep houses and cars because they’re the most valuable things they own. To help you better understand what happens with homes and vehicles in bankruptcy, we surveyed our readers across the United States about their experiences. Here's what we learned.
Can I Keep a House or Car in Bankruptcy?
Yes, but it isn’t automatic, and the requirements depend on whether you file for Chapter 7 or Chapter 13.
Chapter 7 is the bankruptcy type most people prefer because it quickly eliminates debts. Chapter 13’s lengthy three- to five-year process is better suited for filers who don't qualify for Chapter 7. It's also the better chapter for those who want to keep a house or car they would lose in Chapter 7.
How Do I Keep My House or Car in Chapter 7 Bankruptcy?
You can keep a house, car, or both in Chapter 7 but you must be able to meet two conditions.
You Can Protect All Equity With a Bankruptcy Exemption
Each state allows filers to keep some property using bankruptcy exemptions. You’ll use a homestead, motor vehicle, or wildcard exemption to protect home and vehicle equity. If the exemptions available don’t fully protect your equity, the Chapter 7 trustee will sell the property, return the exemption amount to you, and pay creditors with the remaining funds after deducting sales costs.
You Must Be Current on Financed Loans
If you’re still paying for your house or car, you should be caught up on the mortgage or car payment when filing for Chapter 7. Financed homes and vehicles are “secured” debts. The lender can recover the property if you don’t pay as agreed, even if you file for bankruptcy.
What Will Happen in Chapter 7 If My Mortgage or Car Payment Isn’t Current?
If you’re behind on a finance payment, a Chapter 7 filing will likely let you stay in your home or keep your car for a month or two. The period might be longer, but you shouldn’t count on it.
Because home and car loans are secured debts, the lender can file a motion asking the court for permission to recover the property through foreclosure or repossession. The court will agree unless the trustee intends to sell it and use nonexempt equity to pay creditors. Either way, you’ll likely lose the property to the lender or a trustee sale.
Learn about the costs associated with filing for Chapter 7 bankruptcy.
Can I Beat a Creditors’ Chapter 7 Motion and Keep My Property?
Yes, if you can bring your mortgage or car payment current fast. However, while paying overdue payments during Chapter 7 in response to a lender’s motion is theoretically feasible, it rarely happens, and the reason should be apparent.
If you could bring your accounts current, your bankruptcy lawyer would have advised you to delay filing until you assembled the funds and paid the outstanding amount. This simple approach avoids the time and cost of fighting a lender’s motion.
Tip. No one wants to risk losing a home or car when filing for Chapter 7. The only way to ensure you can keep a financed house or car in Chapter 7 is by meeting the abovementioned requirements—exempting all equity and being current on payments. Complying with these two requirements before filing will make for a more predictable, less expensive, and less stressful bankruptcy experience.
If You Lose Your House or Car In Chapter 7 Bankruptcy
Your mortgage debt will be erased or “discharged” entirely in Chapter 7 bankruptcy. You won’t be responsible for paying the difference between the balance and the amount received at auction. Our readers who lost their houses reported an average discharge of $130,000 in mortgage debt after filing Chapter 7.
Our Readers’ Experiences With Cars in Chapter 7 Bankruptcy
Most of our readers (87%) who filed under Chapter 7 kept their cars. Readers who gave up their car in Chapter 7 bankruptcy discharged an average of $13,500 in auto loan debt.
Some lenders will let you keep a car if you "reaffirm" the debt by agreeing to a new contract. Less than two in ten (17%) of our readers told us they reaffirmed their auto loan debt.
If the car is worth less than the balance on your loan, you can ask the court to let you "redeem" it by paying a lump sum for its actual value if you can come up with the money. Readers who chose this option discharged an average of $13,500 in debt for their auto loans.
Learn about negotiating a car loan in Chapter 7 bankruptcy.
Can I Keep My House or Car in Chapter 13 Bankruptcy?
You can keep your home or car if you meet all Chapter 13 qualifications. Chapter 13 is often the better choice when you're behind on your mortgage or car payments but don’t have the funds to bring the loan current. It will also help you save a home or car you’d lose in Chapter 7 because you can’t protect all the equity with a bankruptcy exemption.
How Does Chapter 13 Bankruptcy Work?
Under this type of bankruptcy, the court approves a plan for you to repay the past-due mortgage amounts over three to five years while continuing to make the current mortgage payments. As long you remain current, your lender can't foreclose on the house.
Learn about how much it costs to file for Chapter 13 bankruptcy.
Our Readers’ Experiences in Chapter 13 Bankruptcy
Readers who filed for Chapter 13 bankruptcy were likely to keep their cars. If you're behind on your vehicle loan, you can use a Chapter 13 plan to catch up with your overdue payments. You can also stretch out the car payments over a more extended period, or if the car loan is old enough, you might even be able to lower the balance on the principal and your interest rate.
Some Chapter 13 filers can even erase junior home loans. Learn more about paying off past-due secured debts in Chapter 13.
Many of the readers we surveyed were still making their plan payments. Of the others, however, nearly half (48%) had their case dismissed before they could complete the plan. The court can dismiss a Chapter 13 case for many reasons. Still, most dismissals occur when the debtor can't keep up with the monthly plan payments and living expenses, including their current mortgage payments.
The bottom line? Despite good intentions, not all Chapter 13 bankruptcy filers can keep their houses or cars.
