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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 goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators that provide objective and original content. We also allow you to conduct your own research and compare information for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The deals that are advertised on this site come from companies who pay us. This compensation can affect the way and where products appear on the site, such as, for example, the order in which they may be displayed within the listing categories in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other products for home loans. This compensation, however, does affect the content we publish or the reviews you see on this site. We do not contain the vast array of companies or financial deals that may be available to you.
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5 min read Read 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.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances with precise, well-studied information that breaks down otherwise complex subjects into bite-sized pieces.
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If you’re thinking about it the possibility of bankruptcy, there are options to help keep your vehicle from being repossessed even if you haven’t fully repaid your auto loan. In some states, you might be able avoid repossession of your vehicle through bankruptcy code exemptions. However, the laws differ between states. Can you protect your car through bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you might be able keep a vehicle that you purchased with secured loan.
How to preserve your vehicle through Chapter 7 bankruptcy Car loans are secured, which means the car is pledged as collateral in order to secure the loan. Because the car serves in the capacity of collateral it could be taken by the lender if you fail to maintain payments on the debt. However in Chapter 7, the most frequent bankruptcy for individuals, you have a few options to hold on to your vehicle. “To keep a vehicle while being in Chapter 7, the debtor must be current and current with the lender, perform a ‘redemption,’ which involves paying back the lender or executing an ‘affirmation’ that may require changing the loan conditions, however this requires lender permission,” says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. The following is how reaffirmation and the redemption process works: Redemption: The process of pursuing redemption is a way to pay your creditors the vehicle’s actual reasonable market value. If you can afford to do this, it may make things easier in the future since you’ll have eliminated car payments. But because most people file for bankruptcy during a time when cash isn’t readily available, this may not be an option that is feasible. Reaffirm: This option allows you to continue to pay on your loan as before filing for bankruptcy. By reaffirming your debt you agree to continue to pay in accordance with a plan that you and your creditor, which may include revised loan terms. Bankrate tip
If neither of these options is a good fit for your financial situation, you can sell your car to the creditor and have the debt discharged.
“When you get a Chapter 7 Discharge, you will have no more personal obligation to pay for the loan,” says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. “All the creditor can do is take their collateralthat is, your vehicle. They cannot take you to court for money.” The bankruptcy exemptions when filing for Chapter 7, your assets are liquidated or sold to pay your creditors. However, a bankruptcy court permits the holder to retain a certain amount of your possessions up to a specific amount of money, as per Debt.org. This is referred to as the “exemption.” This is the federal exemption limit is $4,000. But many states set their own limit which must be followed — some states’ exemptions exceed more than $4,000 while some are less. What you can expect to receive for your car in bankruptcy filings does not depend on the price you paid for it. In many states, the value is determined by the value of the car’s cash value determined by factors like the year of the vehicle, its make and mileage. Sources from the automotive industry like Kelley Blue Book or Edmunds may be used to determine the worth of your vehicle. If the value of your vehicle is found to be less than your state’s exemption limits, then you will be allowed to keep your car when you file for bankruptcy. On the other hand in the event that the car is more valuable than the exemption, a bankruptcy trustee may opt to sell the vehicle to you pay off your creditors. Here’s how it works If the exemption for your state is $4,000, and your vehicle’s value is $2,000, you’re likely to be permitted to keep the vehicle since it’s worth less that the amount of exemption. If however, your state’s exemption level is $4,000, and your car is valued at $10,000, the bankruptcy trustee could sell the car and use the profits to pay off your debt. There are a variety of reasons why you should not keep your car in Chapter 7 bankruptcy Keeping your car may not always be feasible when filing Chapter 7 bankruptcy. In some cases, it doesn’t make sense financially to hold on to the vehicle. In the process of deciding on these issues the value of your car as well as your equity in your car are crucial factors. The equity in your car and bankruptcy are similar as a mortgage on a home equity is determined by subtracting the amount you owe on your car loan from the car’s current market value. “For example, if you own a vehicle with a fair market value of $10,000, and the $1000 loan amount, you’ll have $9,000 of equity,” says Rosenblum. When the equity value is more than the exemption the bankruptcy trustee can opt to dispose of the car and apply the proceeds toward paying off your debts. It’s not financially sensible to keep the car. Lastly, it’s also worth bearing to your mind the vehicle’s current fair market value is reflected on the car loan and you want to keep the car won’t necessarily be a smart financial decision. “Very often there is a situation where the loan amount is higher than what you can get for the vehicle and, if there is no way or the desire to keep the car the person filing bankruptcy lets go of the vehicle,” says Michael Sullivan, a personal financial consultant of the non-profit financial counseling firm Take Charge America. How do you keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options for keeping 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, the three-to-five-year repayment plan will be developed that factors in your earnings and assets. The goal for this Chapter 13 process is to allow you to retain your possessions, which includes your car, and pay back your credit card. In addition, if you’re late in your payments, the program will oblige you to make up the gap and pay on time moving forward. Revising the terms for your loan The court could also demand that the lender amend the car loan conditions, which could include decreasing the interest rate this is another method to aid in keeping the vehicle. With revised terms, 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 terms can be forced upon a lender,” says Hawkins. The reduction of the loan amount altering your auto loan terms as part of Chapter 13 may also include what’s known as the “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 a crucial aspect in the cramdown process. In particular, there’s the 910 rule which applies to the cramdown process. Cars that are newer: If you bought your vehicle within 910 days of bankruptcy, then you have to repay the full amount of the car loan, though your interest rate may be reduced. Older cars: If purchased your vehicle more than 910 days before filing for bankruptcy You’re only required to repay the car’s current actual market value. The reasons you shouldn’t keep your car during Chapter 13 bankruptcy In certain circumstances, it may not be possible to keep your car when you are pursuing Chapter 13, or hanging on to it may not make sense. Examples of when this may be the case include: Your loan is in arrears and you don’t have the funds for bringing the loan current or to pay the monthly installments. In this situation, you may have to surrender the vehicle. The car isn’t in good condition or unstable. Under these circumstances, simply selling the car could be a better option. The car is particularly valuable and selling it could yield the funds to pay off your debts. You have significant equity in the vehicle, which exceeds the bankruptcy exemption levels in your state. The bottom line Filing bankruptcy does not automatically mean that a car bought with a secured loan is repossessed. In both Chapter 7 and Chapter 13 bankruptcy laws, there are provisions to protect your car. Consulting a bankruptcy attorney can help you decide which approach to bankruptcy is the best option 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 late 2021. They are dedicated to helping readers gain confidence to take control of their finances by providing concise, well-studied and well-researched content that break down complex topics into manageable bites.
Auto loans editor
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