Translation:The car that was on the street was red.
Joshua.mcf - you would be wrong! ; )
Technically, "that" is used in restrictive clauses, and "which" is used in non-restrictive clauses. Restrictive means the information is necessary for meaning, whereas non-restrictive means you can leave it out.
In this example, it is the car that was in the street that was red--as opposed to the car that was in the driveway, for instance. If the location of the car is not important, you could say, "The car, which was in the street, was red." Note that the words between the commas could be removed without changing the fact that the car was red (see Winmar's comment above).
But as wazzie noted above, most people don't know when to use that and when to use which, so they use what sounds best to them (which is subjective). You'll be understood either way, but please don't say "'that' is actually less correct than 'which' in this case," because it isn't true.