For most Wisconsin residents, a vehicle is not a luxury — it is a necessity for getting to work, taking children to school, and managing daily life. When considering bankruptcy, one of the first questions people ask is: will I lose my car? The answer depends on several factors, including the type of bankruptcy you file, the value of your vehicle, how much you owe, and what options you choose.
Wisconsin’s Vehicle Exemption
Wisconsin law allows debtors to exempt a certain amount of equity in a motor vehicle from the bankruptcy estate. Under Wis. Stat. § 815.18(3)(g), the vehicle exemption is $4,000 per debtor. This means that if your car is worth $4,000 or less (or if your equity in the car — the value minus what you owe — is $4,000 or less), you can keep it free and clear in a Chapter 7 bankruptcy without paying anything to creditors.
For example, if your car is worth $10,000 and you owe $7,000 on it, your equity is $3,000 — which falls within the $4,000 exemption. If your car is worth $10,000 and you own it free and clear, you have $10,000 in equity, which exceeds the exemption by $6,000. In that case, a Chapter 7 trustee could potentially sell the vehicle and distribute the non-exempt equity to creditors, though trustees often abandon assets where the administrative costs make a sale impractical.
Wisconsin does not allow debtors to use the federal bankruptcy exemptions (with narrow exceptions), so the Wisconsin state exemptions apply in most cases.
Your Options in Chapter 7 Bankruptcy
If you are filing Chapter 7 and have a car loan, you generally have three options for dealing with the vehicle:
Reaffirmation: You can reaffirm the car loan, which means you agree to remain personally liable on the debt as if the bankruptcy never happened. In exchange, you keep the car and continue making payments. The lender must agree to the reaffirmation, and the bankruptcy court must approve it (or find that it does not impose an undue hardship). Reaffirmation agreements must be filed before the discharge is entered. The benefit is that you keep the car; the risk is that if you later default, the lender can repossess the car and sue you for any deficiency balance.
Redemption: Under 11 U.S.C. § 722, you can redeem a vehicle by paying the lender the current replacement value of the car in a single lump sum, even if you owe more than the car is worth. This is an excellent option if you are significantly underwater on the car loan (you owe more than the car is worth), because you pay only what the car is worth and the rest is discharged. The challenge is coming up with the lump sum, though specialized lenders (such as 722 Redemption Funding) offer loans specifically for this purpose.
Surrender: You can surrender the vehicle to the lender. The car is returned, the loan balance is discharged (including any deficiency after the lender sells the car), and you walk away with no further obligation. This makes sense if the car is worth far less than you owe, the payments are unaffordable, or you simply do not need the vehicle.
Your Car in Chapter 13 Bankruptcy
Chapter 13 offers additional flexibility for vehicle loans that Chapter 7 does not. In Chapter 13, you can potentially “cram down” your auto loan — reducing the principal balance to the car’s current market value — if you purchased the vehicle more than 910 days (about 2.5 years) before filing bankruptcy (11 U.S.C. § 1325(a)(5)). For example, if you owe $15,000 on a car worth $8,000 and you bought it more than 910 days ago, you can propose a plan that pays the lender only $8,000 (plus interest) through the plan, with the remaining $7,000 treated as unsecured debt and potentially discharged.
Chapter 13 also allows you to catch up on missed car payments over the life of the plan, which can prevent repossession even if you are behind. As long as you continue making plan payments and stay current on ongoing vehicle payments (if paid outside the plan), the lender cannot repossess your vehicle.
Interest rates on car loans in Chapter 13 are also typically reduced to a formula rate set by the bankruptcy court, which may be lower than your original contract rate.
What to Expect if Your Car Has Been Repossessed
If your vehicle was recently repossessed — but not yet sold at auction — filing a bankruptcy petition triggers the automatic stay, which may require the lender to return the vehicle. Time is critical in these situations, as lenders typically sell repossessed vehicles quickly.
Contact Attorney Christopher S. Carson
Your vehicle is too important to leave to chance. Attorney Christopher S. Carson has more than 22 years of experience helping Wisconsin residents navigate bankruptcy and protect the assets that matter most to them. Whether you are considering Chapter 7 or Chapter 13, he will explain your options clearly and help you make the best decision for your situation. Call today for a free consultation: (262) 860-8932.