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Filing for bankruptcy can be a last-resort option if you’re struggling financially. However, assets under your name, including your vehicle, might be impacted while you undergo bankruptcy.
Unlike credit cards, many personal loans—including car loans—are secured debts. Secured loans require collateral. In the case of an auto loan, the collateral is the vehicle itself. When you default on this type of loan, lenders can legally repossess the collateral on the loan (i.e., your car).
But for many people, a car is essential, whether used to get to and from work or to care for an elderly parent. That’s why many there are several ways you can keep your car in bankruptcy.
Options to deal with your car loan in bankruptcy
There are a few options to consider if you have a pre-bankruptcy automobile loan with an outstanding balance.
1. Reaffirm your current car loan
Lenders take one of two positions with a car loan in bankruptcy. The majority require that you complete a court-approved reaffirmation agreement. This is a legal, enforceable contract filed with the bankruptcy court and signed off by the judge. It states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case.
Some lenders demand that you sign this agreement and will not send you statements or report payments to the credit bureau without the court-approved agreement. In many instances, lenders consider it a breach of the terms of your loan and will repossess the vehicle if you fail to sign the agreement.
Outcome: If you sign the reaffirmation agreement, you get to keep your car.
Who this is best for: Those who are certain they will be able to keep up with payments
How to do this: If you want to pursue a reaffirmation agreement, you must do so within 60 days of your first meeting with creditors. The creditor must accept the reaffirmation agreement, and it must be filed with the court.
2. Keep the car and continue making payments
Some lenders allow you to keep making payments and not complete a reaffirmation agreement. You will need to ensure that payments are current, and you may not receive monthly statements after filing your case. It will be up to you to call the lender and determine when the balance is paid off.’
Outcome: You can keep your vehicle.
Who this is best for: Those with the income and discipline to keep making loan payments.
How to do this: Speak with your lender and find out if they allow you to do this.
3. Redeem the car loan with a new lender
Bankruptcy law permits a car owner to reduce the current car balance to the car’s fair market value. For example, if you owe $15,000 and the car is worth only $10,000, you may be eligible to reduce the car balance by $5,000 with a new, post-bankruptcy loan.
A motion to redeem the car loan requires judicial approval. You will apply for the loan with the new lender, and that lender will provide a new car loan offer. Then you will file a motion, along with the offer, with the court.
The current car lender will either agree or disagree with the new car loan value. At that point, you will either reach a settlement on the value between the two lenders or wait for a judicial decision on the car’s fair market value.
Outcome: You may be able to keep the vehicle if you can find a lender willing to offer a new loan and the current lender agrees to the new car loan value.
Who this is best for: This makes sense for those whose car is worth far less than the amount owed on the loan
How to do this: Apply for a loan with the new lender and file a motion to redeem, along with the new loan offer, with the court to get judicial approval.
4. Negotiate directly with the lender
A few lenders will work with you and lower the balance to the fair market value without you needing to redeem the vehicle. Credit unions are the most likely to offer this service. Most lenders do not, but it is worth inquiring with the lender once you file.
Before and after filing, you must keep your car payments current unless you intend to surrender the vehicle.
Outcome: You may be able to keep the vehicle if you can keep the payments current.
Who this is best for: Those who can keep car payments current or have exhausted other options to hang on to their vehicle through bankruptcy.
How to do this: Reach out to your lender directly and explain your circumstances. Be prepared to show how you plan to maintain payments moving forward.
5. Surrender the vehicle
As a final option, you can turn in the vehicle directly to the lender. Get something in writing to prove that you surrendered it. Until then, keep your car insurance current while the car is in your possession. You don’t want to compound your financial troubles with a post-bankruptcy-filing car accident. That debt will not be dischargeable in your bankruptcy if it occurs after the filing.
Once you surrender the car, the lender will sell it, usually for less than the amount you owe. The remaining balance, called the “deficiency balance” should be eliminated in your bankruptcy.
Outcome: You give up the vehicle.
Who this is best for: Those who cannot find other solutions to keep the vehicle or who may not be able to maintain car payments under any circumstances.
How to do this: Return the vehicle directly to the lender and get documentation stating that you have surrendered the car.
Auto loans in Chapter 13 bankruptcy
Options for how to declare bankruptcy and keep your car can depend on the kind of bankruptcy you’re filing.
Under Chapter 13 bankruptcy, you would continue paying off some of your owed debt in a reorganization or restructuring. You would repay the debt as part of a repayment plan for an outstanding car loan balance, but the total amount repaid depends on how old the car loan is:
- Newer car loans. If the vehicle loan is less than 910 days old, you must pay the full value of the car loan. However, there is a chance under the bankruptcy guidelines that the interest rate could be reduced, which might lower the monthly payment.
- Older car loans. If the car loan is older than 910 days, the courts could give you a prorated payment amount based on the car’s fair market value.
If you are already behind on auto loan payments, you may be able to work out an additional financial arrangement with the auto lender.
Auto loans in Chapter 7 bankruptcy
With Chapter 7, also known as liquidation, you would give up assets in exchange for being able to walk away from certain debts. In general, people with car loans can consider the five options discussed above:
- Reaffirming the debt.
- Redeeming the car.
- Continuing repayment to make the loan current.
- Renegotiating the loan terms with the lender.
- Surrendering the car.
When filing for Chapter 7 bankruptcy, the goal is to get your debt back to a “clean slate.” Depending on your situation, you may or may not be given the option to keep your vehicle in the process.
The bottom line
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 your bankruptcy automobile loan.