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Do I Get to Keep My Car After I File for Bankruptcy in Iowa?

On Behalf of | Mar 7, 2022 | Bankruptcy

When you file for bankruptcy in Iowa, you may wonder whether you can keep your car. Your rights to keep your vehicle may depend on several factors, including the type of bankruptcy you are filing for, whether you own your car outright or whether you are still paying a car loan, and the applicable federal and state bankruptcy laws.

What Are the Types of Bankruptcy?

When individuals file for bankruptcy, they typically have two types of bankruptcy to choose from: Chapter 7 and Chapter 13.

In Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” a debtor’s assets are sold off (or “liquidated”) to generate cash. That money is then used to pay some of or all a debtor’s outstanding liabilities. Once creditors are paid the money from the sale of the assets, any remaining debts are discharged by the bankruptcy court (with certain exceptions).

Conversely, in Chapter 13 bankruptcy (also called a “wage earner’s bankruptcy”), the debtor proposes to pay some or all their debts over a three-to-five-year period. They create a repayment plan that must be approved by the bankruptcy court. Disposable income that the debtor earns during the bankruptcy plan is given over to a trustee who uses it to pay back creditors according to the terms of the debtor’s bankruptcy plan. Debt balances that remain at the end of the bankruptcy plan can be discharged (with some exceptions).

What Are Bankruptcy Exemptions

Although most of a debtor’s assets are sold during a Chapter 7 bankruptcy, debtors are permitted to keep certain assets from being liquidated. These exceptions are called “exemptions” and are outlined by statute. Both federal bankruptcy law, as well as Iowa state law, provide a list of exemptions that Chapter 7 debtors can use. Under the federal exemptions, a debtor may exempt up to $4,000 of value in a personal vehicle, while Iowa’s exemptions allow a debtor to protect a vehicle worth up to $7,000. A debtor who files Chapter 7 and has a vehicle worth less than the exemption limit will be entitled to keep their car.

Can You Keep Your Car after Filing for Bankruptcy?

Aside from using bankruptcy exemptions, there are other ways debtors may be entitled to keep their vehicle after filing for bankruptcy. If a debtor is still making payments on their vehicle when they file for Chapter 7 bankruptcy, they have a couple of options. One option involves “redeeming” the vehicle. To do this, the debtor could pay the vehicle’s current replacement value to the lender to own the car outright.

A Chapter 7 debtor may instead choose to enter a reaffirmation agreement with their lender, in which they agree to continue paying off the car loan despite their bankruptcy. However, lenders tend to require strict compliance with a reaffirmation agreement, as a debtor cannot file another Chapter 7 bankruptcy petition within eight years of their last Chapter 7 bankruptcy.

For many debtors, Chapter 13 bankruptcy offers a better option for keeping a vehicle if you are still making loan payments. In Chapter 13 bankruptcy, you can include your car loan in your repayment plan, proposing to pay off the remainder of the note during the repayment plan period. In certain circumstances, you might get your lender to agree to a lower interest rate on your car loan.

If you own your vehicle outright in Chapter 13 bankruptcy, you normally get to keep your car without any extra effort since your disposable income rather than your assets are used to pay your creditors.

Contact a Bankruptcy Lawyer Today

If you are facing the prospect of bankruptcy and want to learn more about how you can keep your automobile or other property, contact the Iowa bankruptcy lawyers of Telpner Peterson Law Firm, LLP, today. You’ll get a free, confidential consultation where you’ll speak with an experienced Council Bluffs bankruptcy attorney.