What Happens to Your Car in a Chapter 7 Bankruptcy in Phoenix?
If you’re considering Chapter 7 bankruptcy, one of the biggest questions on your mind is likely: “Will I lose my car?” That’s a completely valid concern, especially in Phoenix, where public transportation isn’t exactly known for its convenience.
The thought of giving up your wheels can be downright terrifying. But the truth is that what happens to your car in a Chapter 7 bankruptcy in Phoenix depends on the amount of equity you have in the vehicle and the amount of the exemption you qualify for. The good news is that you might not have to lose it at all.
The Basics: What Is Chapter 7 Bankruptcy?
Chapter 7 is a form of personal bankruptcy that wipes out unsecured debts, such as credit cards, medical bills, payday loans, and similar financial baggage. In return, the bankruptcy trustee has the right to sell off certain non-exempt assets to pay creditors.
Bankruptcy Exemptions and Your Vehicle
Arizona law controls which assets you’re allowed to keep in a Chapter 7 filing. These are known as bankruptcy exemptions, and they’re especially important when it comes to your car.
As of 2025, Arizona allows a vehicle exemption of up to:
- $16,000 in equity for a single person
- $26,700 in equity if the filer has a disability or if the vehicle is specially equipped for someone with a disability
If you’re married and filing jointly, you can claim one exemption per person (so two cars total).
Equity refers to the current market value of your car minus what you owe on it. For example, if your car is worth $18,000 and you still owe $6,000 on your auto loan, your equity is $12,000. In this case, since your equity ($12,000) is below the exemption limit, your car is protected, and you can keep it; the trustee can’t sell it, and it won’t be included in the liquidation process.
If your equity exceeds the exemption limit, however, then the trustee can sell the car—but only if doing so would leave a meaningful settlement for creditors after giving you your exempted portion.
What If You’re Still Making Payments?
A lot of folks filing Chapter 7 still owe money on their vehicles. If that’s you, the court looks at your car loan as a secured debt. You have several options.
Reaffirmation Agreement
Sign a reaffirmation agreement with your lender, which means you agree to keep paying the loan under the original terms. If approved by the court, you keep your car and your lender continues to have a lien on the vehicle.
It’s important to remember that when you reaffirm and later default, you’ll still be on the hook for the loan, and bankruptcy won’t cover you again for several years.
Redemption
Pay the lender the current fair market value of the car in a lump sum, even if you owe more than it’s worth. Not everyone can swing this financially, but it can be a great option if you’re underwater on the loan.
Surrender the Car
If the loan balance is high and the car isn’t worth it to you anymore, surrender it to the lender. The remaining debt gets wiped out in bankruptcy. No more payments. No more collection calls.
What If the Car Is Paid Off?
If you own your car outright and your equity is within Arizona’s exemption limits, the trustee can’t touch it, and you don’t have to do anything special to keep it.
If the equity is above the exemption, however, the trustee might try to sell it. But, again, it only happens if there’s enough profit after subtracting the exemption and the cost of sale.
You might be able to negotiate a buy-back, which is where you pay the trustee the non-exempt value to keep the vehicle. That’s where working with an experienced Phoenix bankruptcy law firm really pays off since they know how to make deals like this happen.
Protecting Assets in Chapter 7
Of course, you’re not just worried about your car. The car exemption is just one piece of the puzzle, but it’s a big one for most working Arizonans. You’re likely trying to hang on to every other essential, like your home, personal belongings, work tools, and maybe even a second car.
Protecting assets in Chapter 7 is all about using exemptions smartly and knowing what to prioritize. Arizona also offers exemptions for:
- Your primary residence (homestead exemption up to $425,200)
- Clothing, furniture, and appliances
- Tools of the trade
- Wedding rings and some jewelry
- Social Security and retirement accounts
Why You Need a Phoenix Bankruptcy Lawyer
Every bankruptcy case is different, and Arizona’s laws are strict. Miscalculating your car’s value, forgetting about a lien, or missing a paperwork deadline could mean losing your vehicle unnecessarily.
An experienced Phoenix bankruptcy lawyer can help you:
- Accurately value your car
- Determine if it’s fully exempt
- Decide whether reaffirmation or redemption is best
- Protect other critical assets
- Avoid costly mistakes
Talk to a Phoenix Bankruptcy Lawyer Today
Bankruptcy isn’t about losing everything. It’s about getting a clean slate while holding on to your essentials. But the details matter. Exemption limits, loan status, and even paperwork accuracy can all make or break your case.
If you have any questions about Arizona bankruptcy laws, talk to Cy Hainey at Hilltop Law Firm today. Cy is a bankruptcy attorney who’s been helping people in Phoenix get debt relief for over a decade.
Call (602) 466-9631 to schedule a FREE consultation with our Phoenix bankruptcy lawyer today. If you’re interested in a free Zoom meeting, someone from the Hilltop Law Firm office will be happy to help you set up your virtual meeting in advance.