Keeping your auto: car loans in bankruptcy
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.
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.