Bankruptcy is a legal process used to restructure and eliminate an individual or entity’s debt. Bankruptcy is often presented as an option when the amount of debt exceeds a debtor’s ability to repay it. The types of property and assets that filing for bankruptcy affects will depend on the chapter of bankruptcy that the debtor declares.

For example, individual consumers typically file for Chapter 7 or Chapter 13 bankruptcy. With Chapter 7 bankruptcy, a debtor may be forced to liquidate their assets in order to pay down their debts, but some of those debts can be erased or cancelled by a bankruptcy court. 

On the other hand, with a Chapter 13 bankruptcy, a debtor will be granted a grace period in which they must reorganize their finances, come up with a repayment plan, and repay debts over a period of time.

Both Chapter 7 and Chapter 13 bankruptcy will affect a debtor’s ownership rights over their motor vehicle, but there also may be a way for a debtor to maintain possession of their car under both types of bankruptcy. Whether a debtor will be able to keep their car or not, will largely depend on the circumstances of the bankruptcy filing. 

To learn more about the different chapters of bankruptcy you can file for and whether your ownership rights in your car will be affected by declaring bankruptcy, you should speak to a bankruptcy lawyer in your area as soon as possible. 

Your lawyer will be able to advise you on which chapter of bankruptcy would be most appropriate based on your financial situation. They can provide legal representation during any bankruptcy proceedings that require you to appear before a bankruptcy court. Your lawyer can also make sure that you do not wrongfully lose any ownership rights in your car that either rightfully belong to you or can be avoided by state exemption laws. 

Do You Lose Your Car Title in Bankruptcy?

Many debtors are often concerned over whether they will lose the title to their motor vehicle when they file for bankruptcy. Briefly, the title to a car is a legal instrument that an individual or entity can use to prove that they are the owner and thus have ownership rights over the car described in the title document.

In most states, the title to a car is typically issued by the Secretary of State or a state’s DMV and generally contains the following information:

  • The registered name of the owner of the vehicle (this includes both individual consumers and business organizations);
  • A description of the vehicle that the title is attached to (e.g., car make, model, year, history, etc.); and 
  • The classification or “branding” associated with the car title (e.g., clean, salvage, clear, rebuilt, etc.).

Similar to when a person decides to sell a house or other piece of real property, if the owner of a vehicle decides to sell or trade-in their car, they must also transfer the car title along with the physical car to the new owner. 

Also, just like a mortgage loan on a house or other piece of real property, a lender can place a lien on a car if a person fails to pay off their debts. The lender may then legally seize a person’s car title until they finish paying off their debt in full. Once the debt is completely paid off, the lender will restore the car title and the person will regain full ownership rights.

As previously mentioned, whether or not a debtor will lose their car title in filing for bankruptcy will largely depend on the chapter of bankruptcy that a debtor declares as well as the circumstances surrounding a particular bankruptcy matter. 

In addition, the answer to the question posed above may also vary by state since each state has its own laws on which kinds of property or assets may be exempted from creditors. Such regulations are known as state bankruptcy exemptions and serve to protect certain types of property in a bankruptcy proceeding.

For example, the majority of states allow a debtor to retain their property and assets in a Chapter 13 bankruptcy case. This is because the debtor will be expected to pay off their debts over an extended period of time and in accordance with a Chapter 13 bankruptcy repayment plan. 

As such, even if a debtor is behind on making car payments, the debtor may be able to either request that a car loan be reduced to match their car’s current value or they may pay off the loan in smaller installments as set out by their Chapter 13 bankruptcy repayment plan. 

On the other hand, this issue becomes quite a bit more complicated when a person files for Chapter 7 bankruptcy. Again, this is because Chapter 7 bankruptcy is used to erase or cancel debts. Thus, a person must disclose every item of property and/or assets that belong to them during the process of declaring bankruptcy. 

The majority of states, however, will provide a bankruptcy exemption when it comes to a debtor’s motor vehicle. This means that a bankruptcy court will set aside a certain percentage of equity in a debtor’s car. If the amount of equity set aside is found to be equal to that of the value of a debtor’s car, then they will be able to remain in possession of their vehicle. 

While there are some Chapter 7 bankruptcy cases where a debtor may lose title to their car, they usually will not lose physical possession of it. This is especially true when a debtor needs their car to be able to get to work, so that they can collect a paycheck that will help them to continue paying down their debts.

One last important factor to note regarding bankruptcy cases involving car titles is that the amount of equity a debtor will need to set aside will differ based on individual state laws. In general, however, a car’s “blue book” value is typically the legal standard followed when appraising the amount that a car is worth. 

For instance, if a debtor owns the car in full and is not required to make any payments on it, then the equity will be considered the full value of what the car is currently worth. In contrast, if a debtor does not own their car outright and is required to make payments on a car loan, then the amount of equity will be considered to be equal to the amount they would have left over if they sold the car and used that money to pay back the rest of what they owe on the car loan. 

Do I Need a Lawyer?

The bankruptcy process is not the easiest legal procedure to navigate without the assistance of a legal professional. Therefore, if you intend to file for bankruptcy and you are worried about issues concerning your ownership rights over your car, then you should contact a local bankruptcy lawyer immediately for further legal guidance. 

An experienced bankruptcy lawyer will be able to explain your rights and legal obligations under the laws in your state as well as under federal bankruptcy regulations. Your lawyer can also assist you in determining which possessions you may be able to keep. They can also request an exemption for when creating a repayment plan or while attempting to satisfy any outstanding debts.