Can I Keep My Car in Chapter 7 Bankruptcy?

Filing for bankruptcy is stressful enough without worrying about whether you’ll lose your car in the process. For many of us, a car isn’t just a convenience—it’s essential for getting to work, picking up kids, and handling everyday responsibilities. The fear of losing it can make an already tough situation even worse.

At Yusufov Law Firm PLLC, we understand how important it is to keep the things that matter most. Serving clients in Tucson, Mesa, and Phoenix, we help Arizona residents through Chapter 7 bankruptcy, making sure they understand their options when it comes to their cars and other assets. Let’s break down what you need to know about keeping your vehicle in Chapter 7 bankruptcy in Arizona.

Chapter 7 Bankruptcy and Your Car

Chapter 7 bankruptcy is often called a “liability discharge” because it wipes out most unsecured debts, like credit cards and medical bills. However, it also involves the liquidation of non-exempt assets—which means that if your property isn’t protected under Arizona’s bankruptcy exemptions, it could be sold to pay creditors.

But here’s the good news: Arizona law provides exemptions that protect certain assets from being taken. Your car might be one of them.

A few factors will determine whether you can keep your car in Chapter 7:

• The equity in your vehicle (market value minus loan balance)
• Arizona’s vehicle exemption limit
• Whether you are current on your car payments
• The terms of your car loan agreement

If you still owe money on your car loan, bankruptcy eliminates your personal liability for the debt, but the lender still has a lien on the car—meaning they can repossess it if payments stop.

Arizona’s Vehicle Exemption: What You Need to Know

Arizona has a specific exemption that allows you to protect some or all of your vehicle’s equity from creditors. Here’s how it works:

• The standard exemption protects up to $16,000 of equity in a vehicle.  
• If you or a dependent has a physical disability, the exemption increases to $26,700.
• If you are married and filing jointly, you can protect up to $32,000, but only if you own one vehicle together. The limit is $16,000 per car if you each own separate vehicles.
• These amounts are current as of 2025 and increase annually.

How to Determine Your Car’s Equity

To figure out whether your car is fully exempt, partially exempt, or not exempt at all, follow these steps:

1. Check your car’s market value. Use resources like Kelley’s Blue Book or Edmunds to get an estimate of what your car is worth.
2. Subtract any outstanding loan balance. If you owe $8,000 on a car worth $10,000, your equity is $2,000.
3. Compare your equity to Arizona’s exemption. Your car is protected if your equity is less than the exemption amount. If it exceeds the exemption, the bankruptcy trustee could sell the vehicle, give you the exempt portion, and use the rest to pay creditors.

If your equity is slightly over the exemption, you may sometimes be able to pay the trustee the non-exempt portion and keep the car.

Car Loans and Chapter 7: Options and Considerations

If you still owe money on your car, you have several choices when filing for Chapter 7:

1. Reaffirming the Loan

A reaffirmation agreement is a contract where you agree to keep making payments on your car loan despite the bankruptcy. This allows you to keep your vehicle, but it also means you remain responsible for the loan. If you miss payments in the future, the lender can still repossess the car and sue you for any remaining balance.

A signed reaffirmation agreement is often enough to prevent repossession in Arizona, even if the bankruptcy court doesn’t formally approve it.

2. Redeeming the Vehicle

Redemption allows you to pay off the car’s current market value in a lump sum rather than the entire loan balance. This is beneficial if you owe more than the car is worth. However, coming up with a large lump sum can be challenging.

3. Surrendering the Vehicle

If keeping the car isn’t financially realistic, you can surrender it to the lender. This wipes out the remaining loan balance, and you won’t owe anything further. Sometimes, this is the best option if the payments are too high or the car isn’t worth what you owe.

4. Continuing Payments Without Reaffirmation

Some people continue making payments without signing a reaffirmation agreement, hoping the lender will allow them to keep the car. However, because bankruptcy is considered an event of default under most car loan agreements, the lender still has the right to repossess the vehicle at any time.

Protect Your Vehicle and Your Financial Future: Contact Yusufov Law Firm PLLC Today

If you’re worried about losing your car in Chapter 7 bankruptcy, you don’t have to figure this out alone. The right strategy can mean the difference between keeping your vehicle and starting fresh or facing unnecessary challenges.

Yusufov Law Firm PLLC is here to help. With offices in Tucson, Mesa, and Phoenix, we offer free consultations to discuss your situation and explore the best options for protecting your assets.

Call us today at (520) 745-4429 in Tucson or (480) 788-0098 in Mesa/Phoenix. Let’s find the right solution for you so you can move forward with confidence.