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How to file for bankruptcy and keep your car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by offering interactive tools and financial calculators as well as publishing informative and trustworthy content. We also allow you to conduct your own research and compare information at no cost and help you make sound financial decisions. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies who pay us. This compensation can affect the way and where products appear on the site, such as the order in which they may be listed within the categories of listing, except where prohibited by law. This applies to our mortgage home equity, mortgage and other products for home loans. But this compensation does have no impact on the information we publish, or the reviews appear on this website. We do not contain the entire universe of businesses or financial offers that may be available to you.
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5 minutes read. published on March 20, 2023.
Authored by Mia Taylor Written by Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to take control of their finances with clear, well-researched information that breaks down complicated topics into manageable bites.
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If you’re thinking about it the possibility of bankruptcy, there are options to help keep your car from being taken away — even if you haven’t paid off your auto loan. In many states, you may be able to stay away from repossession of your car through bankruptcy code exemptions. However, the laws vary between states. Can you protect your car through bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you could be able to keep a vehicle that you bought using secured loan.
How to preserve your vehicle by filing Chapter 7 bankruptcy Car loans are , meaning the car is pledged as collateral in order to pay back the loan. Because the vehicle serves as collateral, it can be repossessed by the lender when you do not maintain payments on the debt. However, under Chapter 7, the most popular bankruptcy for individuals, you have a few options for hanging on to your car. “To keep your car while you go through Chapter 7, the debtor has to be current and stay up to date with his lender, perform a ‘redemption that involves making payments to the lender or performing an ‘affirmation’ that could mean altering the loan conditions, but it is subject to lender consent,” says Lamar Hawkins an attorney for bankruptcy at Guidant Law. The following is how reaffirmation and the redemption process works: Redemption: The process of pursuing redemption involves to your creditor for the car’s actual fair market value. If you’re able to make this happen it could make your things easier in the future since you’ll have eliminated car payments. However, because the majority of bankruptcy filings are made in a time where cash is not readily available and available, this might not be a viable option. Reaffirm: This option allows you to continue making payments on your loan until you file for bankruptcy. By reaffirming your debt you sign a new agreement to make payments in accordance with a plan that the creditor and you that could include amended loan terms. Bankrate’s tip
If neither option works financially for you then you may be able to sell your car to the creditor and have the debt wiped off.
“When you are granted a Chapter 7 Discharge, you won’t have any personal responsibility to pay the loan,” says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. “All the creditor can do is seize their collateral- your car. They are not able to take you to court for cash.” Exemptions from bankruptcy you file to file for Chapter 7, your assets are sold off or liquidated to pay creditors. The bankruptcy court will allow the holder to retain a specific amount of your assets up to a certain dollar value, according to Debt.org. This is known as the “exemption.” The maximum federal exemption is $4,000. However, many States have their own exempt limits that must be followed — some states’ exemptions exceed more than $4,000 and some are lower. The value of your car in a bankruptcy filing is not based on what you paid for it. In most states, value is tied to the car’s actual cash value based on such factors as the car’s year, make and mileage. Sources from the automotive industry like Kelley Blue Book or Edmunds may be utilized to determine the value of your vehicle. If your car’s current value is determined to be lower than your state’s exemption limit, you’ll be permitted to keep your car while you’re filing bankruptcy. On the other hand in the event that the car is worth more than the exemption, a bankruptcy trustee may opt to offer the car for sale to pay your creditors. This is how it works If the exemption for your state is $4,000, and your vehicle’s worth is $2,000, then you’ll likely be able to keep the car because it’s worth less that the amount of exemption. If, on the other hand, your state’s exemption level is $4,000, and your car is worth $10,000, then the bankruptcy trustee can take the car off the market and make use of the funds to pay off debt. There are a variety of reasons why you should not keep your vehicle during Chapter 7 bankruptcy Keeping your vehicle may not be feasible when filing Chapter 7 bankruptcy. Plus, sometimes it simply isn’t financially feasible to try and hang on to the car. In the process of deciding on these issues, the value of your vehicle and the equity in the vehicle play a key role. Equity in the car and bankruptcy similar to a mortgage on an investment property equity is determined by subtracting what you still owe on your car loan from the current market value. “For instance, if you own a vehicle with a fair market value of $10,000, and the $1000 loan amount, you’ll have $9,000 equity,” says Rosenblum. When the equity value is more than the exemption that a bankruptcy trustee may decide to sell the vehicle and put the proceeds towards the repayment of your debts. It doesn’t make financial sense for you to hold on to the car. Finally, it’s also worth bearing in mind that if your car’s fair market value is on the car loan, then keeping the vehicle will not necessarily be a wise financial move. “Very often, the loan balance is more that the worth of the vehicle and, if there is no way or the desire to keep the vehicle, the filer lets go of the vehicle,” says Michael Sullivan an expert in personal finance working with the non-profit financial counseling company Take Charge America. How do you keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options to keep your car. “The Chapter 7 framework is the foundation for Chapter 13,” says Rosenblum. “But when you enter Chapter 13, you reorganize your debt.” Making an installment plan as component in Chapter 13 debt reorganization, an initial three to five-year repayment plan will be developed that factors in your income and assets. The aim in Chapter 13 is to Chapter 13 process is to let you keep your possessions, including your car, and pay the debt. If you’re in a position to fall behind in your payments, the program will need you to catch up and pay on time moving forward. The terms of the loan The court could also order that the lender modify the car loan conditions, such as lowering the interest rate, which can help you keep the car. If the terms are changed, the monthly installments will be lower. “A Rewrite of the debt owed to the lender could be done through the Chapter 13 plan, and market conditions can be imposed upon the lender,” says Hawkins. Reduce the loan balance changing auto loan conditions as part of Chapter 13 may also include the process called a “cramdown,” which reduces the amount you must pay to the lender according to the vehicle’s actual market value. The timeline of your purchase of a car is an important factor in the cramdown process. Particularly, there is a rule of 910 that applies to the cramdown process. Newer vehicles: If you bought your car within 910 days after your bankruptcy filing, you must repay the full amount of the car loan, though the interest rate could be decreased. Older vehicles: If you purchased your vehicle more than 910 days before filing bankruptcy You’re only required to pay back the vehicle’s reasonable market price. Reasons you wouldn’t keep your vehicle during Chapter 13 bankruptcy In certain circumstances, it may not be possible to keep your car while you are pursuing Chapter 13, or hanging on to it may not be the best option. Examples of when this may be the case include: Your loan is in arrears and you do not have the money to bring the loan up to date or to make ongoing monthly payments. In this situation it is possible to sell the car. The vehicle is not in good condition or not reliable. Under these circumstances, simply selling the car could be more sensible. The car is particularly valuable, and selling it could yield money for the repayment of your obligations. You own a substantial equity in the car that surpasses the bankruptcy exemption thresholds in the state you reside in. The most important thing to remember is Filing bankruptcy doesn’t automatically guarantee that a vehicle purchased through secured loan will be repossessed. Under each of the Chapter 7 and Chapter 13 bankruptcy codes, you can secure your car. Consulting a bankruptcy attorney will help you determine which approach to bankruptcy makes the most sense for your personal financial situation.
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Written by a Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to take control of their finances through providing concise, well-studied and well-researched content that breaks down otherwise complex topics into digestible chunks.
Auto loans editor
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