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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 better financial choices by providing you with interactive financial calculators and tools, publishing original and objective content. We also allow you to conduct your own research and compare data for free and help you make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that appear on this site come from companies that pay us. This compensation may impact how and when products are featured on the site, such as, for example, the sequence in which they be listed within the categories of listing in the event that they are not permitted by law for our mortgage or home equity products, as well as other home lending products. This compensation, however, does have no impact on the content we publish or the reviews you read on this site. We do not cover the universe of companies or financial offerings that could be accessible to you.
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5 minutes read. published on March 20, 2023.
Writen 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.
The edit was done by 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 the confidence to manage their finances through providing precise, well-studied information that breaks down complicated topics into manageable bites.
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If you’re thinking of doing so alternatives, there are some which can prevent your car from being repossessed — even if you haven’t fully repaid the auto loan. In several states, you could be able avoid repossession of your car through bankruptcy code exemptions, but the laws vary from state to state. Can you protect your car through bankruptcy?
Each Chapter 7 and Chapter 13 bankruptcy contain provisions that you might be able keep a vehicle that you bought with secured loan.
How to preserve your vehicle through Chapter 7 bankruptcy Car loans are secured, which means the car is used as collateral to pay back the loan. Since the car is used in the capacity of collateral it can be repossessed by the lender if you fail to make payments on the debt. However in Chapter 7, the most frequent bankruptcy for individuals there are a variety of alternatives to keep your vehicle. “To keep a vehicle while going through Chapter 7, the debtor must remain current with the lender or perform a’redemption,’ which involves making payments to the lender, or perform an ‘affirmation’ that can involve changing the loan conditions, however this will require lender consent,” says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. This is how reaffirmation and redemption works: Redemption: The process of pursuing redemption means paying your lender for the actual worth. If you can afford to make this happen it can make your life easier in the future since you’ll no longer have to pay for car loans. However, since most people file bankruptcy in a time where cash isn’t readily available, this may not be an option that is feasible. Reaffirm: This option permits you to continue to pay on your loan as before filing for bankruptcy. In reaffirming your debt, you agree a second time to make payments according to a timetable set by both you and your lender that could include amended loan conditions. Tips from Bankrate
If neither option works for your financial situation, you can sell your car to the creditor and get the debt eliminated.
“When you get a Chapter 7 Discharge, you will have no more personal responsibility to pay your loan,” says Pennsylvania-based bankruptcy attorney Dai Rosenblum. “All the creditor is able to do is take their collateral- your car. They cannot pursue you for cash.” Bankruptcy exemptions When you file in Chapter 7, your assets are liquidated or sold to pay creditors. But a bankruptcy court allows that you keep specific amount of your possessions up to a specific monetary value, according to Debt.org. This is referred to as the “exemption.” This is the federal exemption limit is $4,000. But many states have their own exemption limit which must be followed Certain states’ exemptions are higher than $4,000 and some are less. Your value for your vehicle in a bankruptcy filing does not depend on the price you paid for it. In the majority of states, value is based on the car’s actual cash value determined by factors like the year, model, and mileage. Automotive industry sources such as Kelley Blue Book or Edmunds may be used to determine the value of your vehicle. If the value of your vehicle is found to be lower than your state’s exemption limits, then you’ll be able to keep your car when you file for bankruptcy. On the other hand when the vehicle is more valuable than the exemption, the bankruptcy trustee could decide to offer the car for sale to help you pay off your creditors. The way it works is If the state’s exemption is $4,000, and your vehicle’s value is $2,000, you’re likely to be permitted to keep the vehicle since it’s less valuable than the exemption. If you’re on the other side the exemption for your state is $4,000 and your car is valued at $10,000, a bankruptcy trustee may sell the car and utilize 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 making a Chapter 7 bankruptcy. Plus, sometimes it simply doesn’t make sense financially to hold on to the vehicle. When sorting through these questions the worth of your vehicle and the equity in the vehicle play a key role. Equity in the car and bankruptcy similar as a mortgage on a home equity is calculated by subtracting the amount you owe on your car loan from the vehicle’s actual market price. “For example, if have a car with a fair market value of $10,000, and an outstanding $1,000 loan balance, you’ll have equity of $9,000,” says Rosenblum. If the equity is higher than the exemption, a bankruptcy trustee could 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.. Lastly consider keeping to your mind the car’s fair market value is on the car loan and you want to keep the car won’t necessarily be a wise financial move. “Very often it is the case that 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 bankruptcy filer will let go of the vehicle,” says Michael Sullivan, a personal financial consultant with the nonprofit financial counseling firm Take Charge America. How to save your car during Chapter 13 bankruptcy Chapter 13 bankruptcy also gives you several options to keep your car. “The Chapter 7 framework is the basis of Chapter 13,” says Rosenblum. “But in Chapter 13, you reorganize your debt.” The process of creating an installment plan as an element of Chapter 13 debt reorganization, the three-to-five-year repayment plan is created that factors in your income and assets. The aim in the Chapter 13 process is to allow you to keep your possessions, including your car, while paying off your debt. Additionally, if you’re behind in your payments, the program will oblige you to make up the gap and pay your debt on time going forward. Revision of the terms for your loan The court could also order that the lender amend the car loan conditions, such as lower interest rates, which is another way to aid in keeping the vehicle. The terms will be revised, and the monthly installments will be less. “A restructuring of the debt due to the lender can occur through the Chapter 13 plan, and market terms may be imposed upon a lender,” says Hawkins. Reduce the loan balance The process of altering your auto loan conditions as part the process of Chapter 13 may also include what’s known as the “cramdown,” which reduces the amount you must pay to the lender in proportion to your car’s fair market value. The timing of your car purchase is an important factor in the process of cramdown. 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 are required to pay the full value of the car loan but your interest rate may be decreased. Older vehicles: If you purchased your vehicle more than 910 days before filing for bankruptcy You’re only required to pay back the vehicle’s actual market value. The reasons you shouldn’t keep your car in Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your car while pursuing Chapter 13, or hanging on to the car may not make sense. Some instances where this might be the case include: Your loan has been in arrears, and you don’t have the money for bringing the loan current or to make ongoing monthly payments. In this scenario it is possible to give up the vehicle. The car isn’t in good condition or unreliable. In these situations, giving up the car may make more sense. The car is extremely valuable and selling it would provide the funds for the repayment of your obligations. You have significant equity in the car, which exceeds the bankruptcy exemption levels in your state. The most important thing to remember is Filing bankruptcy does not automatically guarantee that a vehicle purchased through secured loan will be repossessed. In each of the Chapter 7 and Chapter 13 bankruptcy laws, there are provisions to protect your car. Working with a bankruptcy attorney can help you decide which approach to bankruptcy is most appropriate for your financial circumstances.
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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 editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain the confidence to take control of their finances through providing precise, well-studied information that break down complicated topics into digestible chunks.
Auto loans editor
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