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What happens to my car when I file for bankruptcy?

Serious woman on white sweater sitting on driver's seat |

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If you are overwhelmed with debt, bankruptcy may be an option to consider to help give you a fresh start. However, you may be wondering: what happens to my car if I declare bankruptcy?

The answer to this question depends on the type of bankruptcy you choose to pursue. There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Also known as liquidation bankruptcy, Chapter 7 is when all your possessions are sold to pay off unsecured debts whereas Chapter 13 involves a three- to five-year repayment plan where you’ll pay off all or a portion of your debts.

What happens to my car once I file for bankruptcy?

You may or may not be able to keep your car when you file for bankruptcy. The type of bankruptcy you choose to pursue, how much equity you have in your vehicle and whether you own the car outright or are financing or leasing it will determine what happens to your car in bankruptcy. Other factors like the value of your car and exemptions in your state will determine what happens to your car once you file for bankruptcy.

Does it depend on the type of bankruptcy?

The type of bankruptcy you go with will significantly affect what happens to your car. If you file for Chapter 7, you’ll be able to keep your vehicle as long as local bankruptcy laws exempt all your equity and you’re up to date on your loan payments.

To figure out how much equity you have in your car, take your loan balance and subtract it from the value of your car. Note that if you’re close to the end of your term, you may not have a lot of equity as vehicles depreciate quickly.

After you know how much equity you have, find the motor vehicle exemption in your state. If you have less equity than the exemption limit, you shouldn’t have any issues keeping your car. Because Chapter 13 involves a debt repayment plan and doesn’t liquidate assets to repay creditors, your property won’t be sold. This means if you own your car, it will likely be yours to keep.

What happens to my auto loan?

The lender may repossess your car if you file for Chapter 7 and aren’t in good standing with your loan. Because you haven’t kept up with your loan payments, your vehicle won’t be protected by any exemptions.

Depending on your situation, you may be able to keep the car if you repay the rest of the loan in one lump sum or sign a reaffirmation agreement. In a reaffirmation agreement, you agree to pay for the car loan as you would if you hadn’t filed for bankruptcy.

If you sign a reaffirmation agreement and decide you don’t want to keep your car, you can rescind or cancel it. You’ll need to do so within 60 days after you sign the agreement or before the court gets involved with your discharge — whichever option is later. You won’t have to pay for your vehicle if you rescind and return it in time.

When it comes to Chapter 13 bankruptcy and your car loan, the amount you owe on it may be reduced, especially if you owe more than it’s worth. In addition, if you’re eligible for a repayment plan and catch up on your loan, you might be able to keep your car.

Final considerations

There’s a good chance your car is one of your most important possessions. After all, it allows you to run errands, drive to and from work, attend social events and live your everyday life. Before you move forward with Chapter 7 or Chapter 13 bankruptcy, make sure you understand exactly how it will affect your car.

If you determine and confirm that you won’t be able to keep your car for any reason, figure out how you’ll get around. This way you can continue to do the things you normally do as you go through the bankruptcy process.

Next steps

Bankruptcy may seem like an easy way to get out of debt. The truth is it can damage your credit score and make it difficult for you to qualify for financing in the future. If you decide Chapter 7 or Chapter 13 is right for you, make sure you’re clear on what will happen to your car and auto loan if you have one.

Written by
Anna Baluch
Contributing writer
Anna Baluch is a former Bankrate contributing writer. She is a personal finance freelance writer from Cleveland who enjoys writing about debt, mortgages, student loans, personal loans and auto financing.
Edited by
Loans Editor, Former Insurance Editor