If you're considering bankruptcy, it can be hard to decide what to do with your car loan. You may have difficulty paying all your debts, but at the same time, you want to keep your vehicle.
In fact, it could be nearly impossible to get back on your feet financially without the use of a car, which is often needed to travel to a job and earn money, says Andrew Radmin, a bankruptcy attorney with Carkhuff & Radmin in North Plainfield, N.J.
Fortunately, it is possible to keep a car in bankruptcy. "For people who have a vehicle, are financing it and want to keep it, there's a method that can be used for them to continue to make payments and maintain the car they own," says Radmin.
The exact method to use depends on the type of bankruptcy that's filed, Chapter 7 or Chapter 13, says Kevin Gallegos, vice president of operations for Freedom Debt Relief, a financial services organization in Tempe, Ariz.
Here's a look at the options for car loans under each type of bankruptcy.
Auto loans in Chapter 13 bankruptcy
Under Chapter 13, the borrower would continue to pay off some of his or her debts in a reorganization, or restructuring, of what he or she owes, says Gallegos. The borrower would repay the car loan debt as part of the repayment plan, but the total amount repaid would depend on how old the car loan is, he says.Newer car loans. If the vehicle loan is less than 910 days old, the borrower must pay the full value of the car loan, says Gallegos. However, there is a chance under the bankruptcy guidelines that the interest rate could be reduced, he says, which might lower the monthly payment.
Older car loans. If the car loan is older than 910 days, the courts would give the borrower a prorated payment amount based on how much the car is worth, says Gallegos. "They'll take a look at the car's current fair market value, and they'll create a payment plan from that," he says.
Borrowers who are already behind on their auto loan payments may be able to work out an additional financial arrangement with the lender, says Radmin. "You would not only make the regular payments, but whatever the arrears are, you could also make up those payments in a Chapter 13 framework," he says.
Auto loans in Chapter 7 bankruptcy
With Chapter 7, also known as liquidation, the borrower gives up assets in exchange for being able to walk away from debt, says Gallegos. In general, people with car loans have three options under Chapter 7 bankruptcy, he says. They can reaffirm the debt, redeem the car or surrender it.