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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 smarter financial decisions by offering interactive financial calculators and tools that provide objective and original content. We also allow users to conduct research and compare information for free to help you make sound financial decisions. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including for instance, the order in which they may be displayed within the listing categories in the event that they are not permitted by law. Our mortgage or home equity products, as well as other home lending products. However, this compensation will have no impact on the content we publish or the reviews appear on this website. We do not contain the vast array of companies or financial deals that may be accessible to you.
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5 min 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 editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to manage their finances with concise, well-researched and well-researched content 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 which can prevent your car from being taken away -- even if you haven't fully repaid the auto loan. In several states, you could be able to stay away from repossession of your car through bankruptcy code exemptions, though the laws differ between states. Can you protect your car through bankruptcy?
The two chapters Chapter 7 and Chapter 13 bankruptcy contain provisions that you might be able keep a vehicle that you bought using a secured loan.
How do you keep your car by filing Chapter 7 bankruptcy Car loans are , meaning the car is pledged as collateral in order to back the loan. Because the vehicle serves as collateral, it can be repossessed by the lender if you fail to keep up with the payments. However, under Chapter 7, the most frequent bankruptcy for individuals, you have a few alternatives to keep your car. "To keep a vehicle while you go through Chapter 7, the debtor must be current and stay current with the lender and perform a'redemption or redemption,' which is making payments to the lender, or perform the'reaffirmation', which may require changing the loan conditions, but it will require lender approval," says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. Here's how redemption and reaffirmation work: Redemption: Pursuing redemption means paying your lender the vehicle's actual fair market value. If you're able to make this happen it can make your life simpler 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 it's not an option for you. Reaffirmation: This option permits you to continue to pay on your loan until you file for bankruptcy. By reaffirming your debt you agree a second time to continue making payments in accordance with a plan agreed upon by you and your creditor and may also include revised loan conditions. Bankrate's tip
If neither of these options is a good fit for your financial situation You can also surrender your vehicle to the lender and get the debt wiped off.
"When you receive an Chapter 7 Discharge, you won't have any personal obligation to pay your loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor can do is seize their collateralthat is, your vehicle. They are not able to pursue you for money." Exemptions from bankruptcy you file to file for Chapter 7, your assets are sold off or liquidated to pay your creditors. However, a bankruptcy court permits the holder to retain a certain amount of your assets up to a specific amount of money, as per Debt.org. This is known as"exemption. "exemption." It is a federal exemption limit. maximum federal exemption is $4,000. However, some states set their own limits that must be followed Some states' exemptions exceed more than $4,000 while some are lower. What you can expect to receive for your vehicle in bankruptcy filings is not based on what you paid for it. In many states, the value is based on the value of the car's cash value determined by factors like the year, model, and mileage. Car industry sources like Kelley Blue Book or Edmunds can be used to determine the value of your vehicle. If the current value of your car is determined to be lower than your state's exemption limit, then you will be allowed to keep the vehicle even though you're filing for bankruptcy. On the other hand when the vehicle is more valuable than the exemption, a bankruptcy trustee may opt to sell the vehicle in order to you pay off your creditors. This is how it works If the exemption for your state is $4,000 and your car's value is $2,000, you're likely to be permitted to keep the vehicle because it's worth less that the amount of exemption. If, on the other hand the exemption for your state is $4,000 and your car is valued at $10,000, a bankruptcy trustee may take the car off the market and use the profits to pay off your debt. Reasons you wouldn't keep your car during Chapter 7 bankruptcy Keeping your car isn't always feasible when making a Chapter 7 bankruptcy. Plus, sometimes it simply does not make financial sense to try and hang on to the car. When sorting through these questions, the value of your car as well as your equity in your car are crucial factors. Car equity and bankruptcy Similar as a mortgage on an investment property equity is determined by subtracting what you still owe on your car loan from the vehicle's current market value. "For example, if have a car with a fair market value of $10,000 and the 1,000 loan balance, you have $9,000 of equity," says Rosenblum. If the equity is higher than the exemption, a bankruptcy trustee could decide to sell the vehicle and apply the proceeds toward paying off debts. It's not economically sensible for you to hold on to the car. Finally you should keep to your mind the vehicle's current fair market value is included in the loan and you want to keep the vehicle will not necessarily be a wise financial move. "Very often it is the case that the loan balance is more than what you can get for the car, and without the means or desire 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 agency Take Charge America. How to keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy offers a variety of ways to keep your vehicle. "The Chapter 7 framework is the basis for Chapter 13," says Rosenblum. "But with Chapter 13, you reorganize your debt." The process of creating the payment plan is a part the Chapter 13 debt reorganization, an initial three to five-year repayment plan is created that takes into consideration your earnings and assets. The purpose for the Chapter 13 process is to enable you to keep your possessions, including your car, while paying the debt. Additionally, if you're behind on payments, the plan will need you to make up the gap and pay on time moving forward. Revising the conditions that apply to your loan The court may also demand that the lender amend the car loan conditions, such as decreasing the interest rate this is another method to aid in keeping the vehicle. The terms will be revised, and the monthly payments will be lower. "A Rewrite of the debt due to the lender could be done by way of a Chapter 13 plan, and market terms can be forced upon the lender," says Hawkins. The reduction of the loan balance altering your auto loan terms as part of Chapter 13 may also include the process known as"cramdown. "cramdown," which reduces the amount you pay the lender according to the vehicle's actual market value. The timing of your purchase of a car is an important factor in a cramdown. In particular, there is the 910 rule which applies to cramdowns. Newer vehicles: If you bought your car within 910 days of your bankruptcy, then you are required to be able to pay the entire amount of the car loan but the rate of interest may be reduced. Older vehicles: If you purchased your vehicle more than 910 days prior to filing for bankruptcy then you're only required repay the car's current actual market value. Reasons you wouldn't keep your vehicle during Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your vehicle when you are pursuing Chapter 13, or hanging on to it may not be the best option. Examples of when this may hold true include: The loan is in arrears and you don't have the financial resources in order to make the loan current or the ability to pay the monthly installments. In this situation it is possible to give up the vehicle. The car isn't in good condition or not reliable. In these situations, surrendering the vehicle could make more sense. The car is particularly valuable and selling it would provide the funds for the repayment of your obligations. There is a significant equity stake in the car, which exceeds the bankruptcy exemption levels in your state. The final result Filing bankruptcy does not automatically guarantee that a vehicle purchased through secured loan is repossessed. In the both Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. A bankruptcy lawyer can assist you in deciding which bankruptcy option is most appropriate for your financial situation.
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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.
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 passionate about helping readers gain the confidence to take control of their finances through providing precise, well-studied information that breaks down otherwise complex topics into manageable bites.
Auto loans editor
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