When you file for bankruptcy, you are permitted to keep certain property up to a specified dollar limit as exempt property under bankruptcy law. You can seek exemption for your car.
The exemption for cars under the federal bankruptcy exemption is $3,225. The equity in your car is based on the car's market value, less any loans against it. If your equity is more than $3,225, it's possible that you could apply exemption amounts from other categories, such as the exemption for tools of the trade. If the trustee sells it, you're entitled to receive the exemption amount. Finally, it's possible to pay the trustee the amount above the exemption and keep the vehicle. The exemption for cars under state bankruptcy exemptions vary from state to state.
If you intend purchasing a new car before bankruptcy, you can expect your purchase to be questioned by the trustee especially if the new car is an unsecured purchase and made within 90 days before filing. The trustee can interpret this purchase as an attempt to divert your funds and not using these funds to pay your creditors. The trustee will review all the purchases you make just before filing to ensure that the purchases are legitimate and not make with an intention to not to pay for the purchase by filing for bankruptcy or to reduce the interest rate in a Chapter 13 payment plan. If the trustee determines that you have made the purchase with the intention of not paying or reducing the interest rate or to diverting funds to avoid paying your creditors, the trustee can request the court to reject your bankruptcy petition.
If you have a debt-free older car that you cannot protect in bankruptcy, with proper planning you may be able to trade it in for a newer car. The trade-in equity will likely be far lower than the value of the debt-free car, so much so that a trustee will not object.
Getting Legal Bankruptcy Help
If you intend purchasing a car just before filing for bankruptcy, you should consult an experienced bankruptcy. The attorney can help you plan the purchase and ensure that the purchase does not violate any law. A bankruptcy attorney is not, however, allowed to advise you to buy a new car before filing, because Congress has seen fit to bar “debt relief agencies” from advising someone to incur new debt.