Filing for bankruptcy can be a difficult decision, especially if you have a car loan that you need to pay off.
You may wonder if you can keep your car after declaring bankruptcy, or if you will lose it to your creditors.
The answer depends on several factors, such as the type of bankruptcy you file, the value of your car, and the terms of your loan agreement.
In this article, we will explain some of the options you have to deal with your car loan in bankruptcy, and how to protect your vehicle from repossession.
An infographic of How to File for Bankruptcy and Keep Your CarChapter 7 bankruptcy and car loan
Chapter 7 bankruptcy and car loans address how individuals manage car loan debt during Chapter 7 bankruptcy proceedings.
While Chapter 7 bankruptcy discharges most unsecured debts like credit cards and medical bills, it treats secured debts differently, such as car loans.
In Chapter 7 bankruptcy, individuals have several options for dealing with their car loans:
- Surrendering the car: Returning the car to the lender to wipe out the loan balance. This avoids owing any deficiency balance or fees but results in losing the car.
- Reaffirming the loan: Agreeing to keep the car and continue making loan payments, remaining liable for the full amount of the loan even if the car’s value is less than what’s owed.
- Redeeming the car: Paying the lender the current market value of the car in one lump sum to keep the car, requiring court approval and sufficient funds.
- Taking no action: Neither reaffirming nor redeeming the car but continuing to make loan payments. While this may allow keeping the car if payments are current, it poses risks of repossession post-bankruptcy discharge.
The best option depends on factors such as the car’s value, loan amount, income, expenses, and state laws.
Consulting a bankruptcy attorney is recommended before deciding on a course of action regarding a car loan in Chapter 7 bankruptcy.
Chapter 13 bankruptcy and car loan
Chapter 13 bankruptcy and car loans discuss managing car loan debt within Chapter 13 bankruptcy proceedings.
Unlike Chapter 7 bankruptcy, which may entail surrendering the car, Chapter 13 offers more options for retaining the vehicle and reducing loan balances.
Here are the advantages of Chapter 13 bankruptcy for car owners:
- Repossession Prevention: Filing for Chapter 13 initiates an automatic stay, halting creditors from repossessing your car. If your car was repossessed pre-filing, swift action and meeting specific criteria may enable its recovery.
- Payment Catch-Up: Arrears on car loan payments can be incorporated into your Chapter 13 repayment plan, allowing a gradual payoff devoid of interest or penalties, thus maintaining car ownership upon adherence to the plan and regular payments.
- Interest Rate Reduction: Chapter 13 may lower high-interest car loan rates using the “Till rate,” often lower than market rates, particularly for subprime loans.
- Principal Balance Reduction: Qualifying for a “cramdown” could reduce the loan balance to your car’s current market value, with the remainder treated as unsecured debt potentially discharged post-plan completion.
However, Chapter 13 entails certain drawbacks for car owners:
- Completion Requirement: Fulfilling the Chapter 13 plan mandates committing disposable income to payments for three to five years; failure risks losing plan benefits and car repossession or case dismissal.
- Administrative Fees: Chapter 13 involves court and trustee fees deducted from plan payments, potentially reducing creditor payments, including car lenders.
- New Loan Challenges: Chapter 13 impacts credit scores and new credit access, potentially resulting in higher interest rates, stricter terms, or needing court approval for new debt during or post-bankruptcy.
Bankruptcy exemption for car
The topic of car bankruptcy exemption concerns safeguarding the equity in your vehicle when undergoing bankruptcy proceedings.
Equity denotes the variance between your car’s market value and the outstanding loan amount.
Depending on your bankruptcy type and state of residence, you may utilize a motor vehicle exemption or wildcard exemption to shield your car from trustee sale or lender repossession.
The motor vehicle exemption permits safeguarding a specific equity amount across one or more vehicles, varying by state from $1,000 to $25,000.
Additionally, some states offer a wildcard exemption, allowing the protection of a general equity sum across any property.
Combining both exemptions may extend coverage over more car equity.
In Chapter 7 bankruptcy, car retention hinges on the exemption fully covering car equity.
Insufficient coverage may lead to trustee sale, with the proceeds paying the exempt portion, or potential negotiation for buying back non-exempt equity.
Decision-making regarding car loan surrender, reaffirmation, or redemption is also crucial.
Under Chapter 13 bankruptcy, car retention prevails irrespective of exemption, contingent on repaying non-exempt equity value via the repayment plan.
Options to mitigate car loan balance or interest rate, dependent on purchase time and outstanding balance, may also be available.
Reaffirmation agreement for car loan
A reaffirmation agreement regarding a car loan is a legal document signed with your lender post filing for Chapter 7 bankruptcy.
It signifies your commitment to continue paying the car loan as if bankruptcy was not filed, assuming full responsibility for the debt, even in case of repossession or selling the car for less than the owed amount.
While it allows car retention and avoids repossession, it entails certain risks and responsibilities. Weighing the pros and cons and seeking advice from a bankruptcy attorney is crucial before proceeding.
Benefits of reaffirming the car loan include retaining car ownership for transportation or work, maintaining a positive relationship with the lender, and potentially improving credit score through timely payments reported to credit bureaus.
To reaffirm the car loan, follow these steps: Express intent to reaffirm in the Statement of Intentions filed with the court, receive and review the lender’s reaffirmation agreement, ensure comprehension and potential negotiation for favorable terms, and sign and return the agreement.
Before the deadline, possibly filing a copy with the court attending a hearing for approval, and consistently making payments as agreed to avoid default and potential consequences like repossession and legal action.