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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 providing you with interactive financial calculators and tools that provide objective and original content. We also allow you to conduct research and compare information at no cost to help you make financial decisions with confidence. Bankrate has partnerships with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this website are provided by companies that pay us. This compensation may impact how and where products are displayed on this site, including for instance, the order in which they be listed within the categories of listing in the event that they are not permitted by law. Our mortgage home equity, mortgage and other home loan products. This compensation, however, does not influence the information we publish, or the reviews that appear on this website. We do not contain the entire universe of businesses or financial deals that may be available to you.
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5 minutes read. Published 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 writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to manage their finances by providing precise, well-studied information that breaks down otherwise complex topics into manageable bites.
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If you're considering the possibility of bankruptcy, there are options to help keep your car from being taken away even if you aren't able to fully repay the auto loan. In several states, you could be able avoid repossession of your car through bankruptcy code exemptions, though the laws differ from state to state. Can you protect your car by filing bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy have provisions that you could be able to keep the car you purchased with secured loan.
How do you keep your car through Chapter 7 bankruptcy Car loans are , meaning the car is used as collateral to secure the loan. Because the car serves to serve as collateral for the loan, it could be taken by the lender in the event that you fail to keep up with the payments. However under Chapter 7, the most well-known bankruptcy for people, you have a few options for hanging on to your car. "To keep your car while going through Chapter 7, the debtor has to be current and stay current with the lender, perform a 'redemption,' which involves paying off the lender or performing the'reaffirmation', which could mean changing the loan terms, but this will require lender consent," says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. This is how reaffirmation and redemption work: Redemption: Pursuing redemption is a way to pay your creditors for the car's current fair market value. If you can afford to make this happen it could make your life easier in the future since you'll have eliminated car payments. However, because the majority of people file bankruptcy at a time when cash is scarce, this may not be an option that is feasible. Reaffirm: This option permits you to continue to pay on your loan until you file for bankruptcy. When you reaffirm your debt, you agree to continue to pay according to a timetable that you and your creditor that could include amended loan terms. Tips from Bankrate
If neither option is working for your financial situation, you can sell your car to the creditor and have the debt wiped off.
"When you receive a Chapter 7 Discharge, you won't have any personal obligation to pay for your loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor can do is seize their collateralthe car. They cannot sue you for money." The bankruptcy exemptions when filing to file for Chapter 7, your assets are liquidated or sold to pay creditors. But a bankruptcy court allows the holder to retain a specific amount of your possessions up to a specific dollar value, according to Debt.org. This is known as the "exemption." It is a federal exemption limit. Federal exemption limit is $4,000. However, some states have their own exemption limit that must be followed Some states' exemptions are higher than $4,000 while some are less. The value of your car when you file bankruptcy is not determined by the amount you paid for it. In the majority of states, value is tied to the actual value of the vehicle based on such factors as the year of the vehicle, its make and mileage. Car industry sources like Kelley Blue Book or Edmunds may also be used to help determine the worth of your car. If the value of your vehicle is found to be lower than the state's exemption limits, then you'll be able to keep the car even when you file for bankruptcy. On the other hand in the event that the car is valued higher than the exemption limit, a bankruptcy trustee may opt to sell the car to help you pay off your creditors. Here's how it works If the state's exemption is $4,000, and your vehicle's value is $2,000, you will likely be allowed to keep the vehicle since it's less valuable than the exemption. If however the exemption for your state is $4,000, and your car is worth $10,000, a bankruptcy trustee may 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 making a Chapter 7 bankruptcy. Plus, sometimes it simply doesn't make sense financially to try and hang on to the car. In the process of deciding on these issues the worth of your car as well as your equity in the car will play an important role. Car equity and bankruptcy Similar as a mortgage on the property equity is determined by subtracting the amount you owe on the car loan from the vehicle's current market value. "For example, if you have a car with a fair market value of $10,000 and a 1,000 loan balance, you have $9,000 of equity," says Rosenblum. If the equity is greater than the exemption the bankruptcy trustee can decide to sell the vehicle and apply the proceeds toward the repayment of your debts. It doesn't make financial sense for you to hold on to the car. Finally you should keep to your mind the vehicle's current fair market value is reflected on the car loan, then keeping the car won't necessarily be a wise financial move. "Very often, the loan amount is higher than what you can get for the car and, if there is no way or motivation to keep the car the person filing bankruptcy lets go of the vehicle," says Michael Sullivan who is a personal financial advisor working with the non-profit financial counseling firm Take Charge America. How to keep your car through Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of ways to keep your vehicle. "The Chapter 7 framework is the basis of Chapter 13," says Rosenblum. "But in Chapter 13, you reorganize your debt." Creating the payment plan is a an element the Chapter 13 debt reorganization, an initial three to five-year repayment plan will be developed which takes into account your income and assets. The aim in this Chapter 13 process is to enable you to keep your possessions, including your car, while paying back your credit card. Additionally, if you're behind on your payments, the process will need you to catch up and pay your debt on time going forward. Revision of the conditions for the loan The court may also demand that the lender modify the car loan conditions, which could include decreasing the interest rate which can aid in keeping the vehicle. If the terms are changed, the monthly installments will be lower. "A rewrite of the debt owed to the lender can occur via the process of a Chapter 13 plan, and market terms may be imposed upon the lender," says Hawkins. Reduce the loan balance The process of altering your auto loan conditions as part of Chapter 13 may also include what's called"cramdown. "cramdown," which reduces the amount you must pay to the lender in proportion to your car's fair market value. The timeframe of your car purchase is an important factor in the process of cramdown. Particularly, there is the 910 rule which applies to the cramdown process. Cars that are newer If you purchased your vehicle within 910 days of bankruptcy application, you must pay the full value of the loan, though the interest rate could be reduced. Older vehicles: If you purchased your car 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 car during Chapter 13 bankruptcy In certain situations, it might not be possible to keep your car when you are pursuing Chapter 13, or hanging on to your car might not be the best option. Examples of when this may be the case include: Your loan is in arrears and you don't have the funds to bring the loan current or to pay the monthly installments. In this case, you may have to give up the vehicle. The vehicle is not in good condition or not reliable. Under these circumstances, simply selling the car could be a better option. The car is particularly valuable, and selling it would provide money for the repayment of your outstanding debts. You have significant equity in the car that exceeds the bankruptcy exemption levels in your state. The bottom line Filing bankruptcy does not automatically mean that a car bought with secured loan will be repossessed. Under the both Chapter 7 and Chapter 13 bankruptcy codes, provisions protect your car. Working with a bankruptcy attorney will help you determine 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.
Edited by 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 confidence to control their finances with clear, well-researched information that breaks down otherwise complex topics into manageable bites.
Auto loans editor
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