If you’re considering bankruptcy, keep in mind there are several options to protect your secured car loans and keep the repo man away from your door.
In many states you may be able to avoid repossession through allowable bankruptcy code exemptions, says Kevin Gallegos, vice president of Freedom Debt Relief, based in Tempe, Ariz. These exemptions vary greatly from state to state and there are advantages and disadvantages to each.
First, whether you file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code, you can expect an automatic stay to take effect, Gallegos says. This stay prevents debt collection, wage garnishment, lawsuits related to your finances, foreclosure and repossession. The automatic stay remains effective until the court discharges your case.
What happens to car loans when you file bankruptcy depends on how long ago you purchased the car. Here’s how car loans are handled in Chapter 7 and Chapter 13 personal bankruptcy:
Car loans under Chapter 7
Car loans are secured debt — the car is pledged as collateral to back the loan. Under Chapter 7 you have three options:
- Redeem: This option involves one lump sum payment to your creditor for the car’s current fair market value. If you can afford to do this, it may make life easier in the future, since you’ll have eliminated car payments. But because most people file for bankruptcy at a time when cash is not handy, it may not be a viable option for many filers.
- Reaffirm: This option allows you to essentially continue making payments on your lease or loan as you did before you filed for bankruptcy. In reaffirming your debt, you agree a second time to continue making payments according to a schedule agreed upon by you and your creditor.
- Surrender: If neither continuing payments nor redeeming the car will work for you financially (for example, if you owe more on the car than it’s currently worth), you can also choose to surrender your vehicle to your creditor and have the remainder of your debt discharged.
Car loans under Chapter 13
Under Chapter 13 bankruptcy, your car’s future will depend on when you bought it.
- Newer cars: If you bought your car within 910 days of your bankruptcy filing, you’re required to pay the full value of the car loan, though your interest rate may be reduced.
- Older cars: If you purchased your car more than 910 days before filing for bankruptcy, you’re only required to repay the car’s current fair market value.