Keeping your auto: car loans in bankruptcy

Reaffirm the debt. When you reaffirm car loan debt, you agree to continue making payments on your auto loan and maintaining your car, even while you may be giving up other property and other debts under Chapter 7, says Gallegos.

To choose this option, the borrower needs to sign a Chapter 7 Individual Debtor's Statement of Intention, says Radmin. This legal document lists secured debts, and the determination is made by the debtor on what he or she would do with those debts. In this case, the debtor would be reaffirming it.

As you make payments after reaffirming debt, lenders will continue to report your car loan payments to credit reporting agencies, says Gallegos. This can help you take steps to improve your credit after your bankruptcy.

However, there are risks. "If you do reaffirm the debt and are unable to make the payments, you could still end up having your car repossessed in the future," he says.

Redeem the car. Another option for borrowers is to redeem their car, which means coming up with the money to completely pay off the loan in a lump-sum payment, says Gallegos. It's a very difficult thing to do, but some borrowers may be able to get the funds to pay off the car from another source, such as family or friends, he says.

Surrender the car. Borrowers may also return their car to the lender in bankruptcy, says Gallegos. "If you realize that you may not be able to make your payments, you can surrender the automobile," he says.

This may be an undesirable option, but giving up a car with a burdensome car loan can also give borrowers a chance to downsize and have a fresh start with a cheaper car, says Gallegos.

"You could surrender the vehicle, save money, and pay cash for another car that can still get you around until you can afford a better situation," he says.

No bankruptcy is easy, but if you have a car loan, it is possible to find a more manageable debt situation after you've filed. Take a look at your options and work with your bankruptcy attorney to determine the best alternative for you.

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