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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 you interactive financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare information at no cost and help you make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The products that appear on this site come from companies that compensate us. This compensation may impact how and where products appear on this website, for example the sequence in which they appear within the listing categories and other categories, unless prohibited by law. This applies to our mortgage home equity, mortgage and other home lending products. But this compensation does have no impact on the information we provide, or the reviews that you see on this site. We do not contain the entire universe of businesses or financial offers that may be open to you.
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5 minutes read. Published March 20, 2023
Written 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 passionate about helping readers gain confidence to take control of their finances with concise, well-researched and well-researched content that breaks down complicated subjects into bite-sized pieces.
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If you're considering alternatives, there are some to help keep your car from being repossessed -- even if you haven't paid off your auto loan. In several states, you could be able avoid repossession of your car through bankruptcy code exemptions, though the laws differ between states. Are you able to protect your vehicle through bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you could be able to keep the car you purchased with secured loan.
How to preserve your vehicle by filing Chapter 7 bankruptcy Car loans are secured by the vehicle, which means that it is pledged as collateral to pay back the loan. Because the car serves as collateral, it can be taken by the lender in the event that you fail to make payments on the debt. However under Chapter 7, the most frequent bankruptcy for individuals there are a variety of alternatives to keep your vehicle. "To keep a vehicle while you go through Chapter 7, the debtor has to be current and stay in good standing with their lender or perform a'redemption or redemption,' which is paying back the lender or executing an 'affirmation' that may require altering the loan conditions, however this requires lender permission," says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. Here's how redemption and reaffirmation are done: Redemption: Obtaining redemption is a way to pay your creditors the vehicle's current fair market value. If you can afford to make this happen it could make your life simpler later on because you'll be able to eliminate car payments. However, since most bankruptcy filings are made in a time where cash is scarce and available, this might not be a viable option. Reaffirm: This option allows you to make payments on your loan prior to filing for bankruptcy. In reaffirming your debt, you agree to continue to pay according to a timetable set by the creditor and you that could include amended loan conditions. Bankrate tip
If neither option is working financially for you, you can sell your car to the lender and get the debt discharged.
"When you are granted a Chapter 7 Discharge, you will have no more personal obligation to pay for this loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor has to do is take their collateral -the car. They are not able to sue you for cash." Exemptions from bankruptcy 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 specified amount of your property up to a certain 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. But many States have their own exempt limits that must be adhered to Certain states' exemptions are more than $4,000, while others are less. What you can expect to receive for your vehicle in bankruptcy filings is not determined by the amount you paid for it. In most states, value is based on the value of the car's cash value determined by factors like the car's year, make and mileage. Sources from the automotive industry like Kelley Blue Book or Edmunds could also be used to help 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'll be permitted to keep the vehicle even though you're filing for bankruptcy. On the other hand when the vehicle is valued higher than the exemption, the bankruptcy trustee could decide to sell the vehicle in order to repay your debts. This is how it works: If your state's exemption is $4,000 and your car's value is $2,000, you'll likely be able to keep the vehicle since it's value is less that the amount of exemption. If however, your state's exemption level is $4,000, and your car is worth $10,000, a bankruptcy trustee may sell the vehicle and make use of the funds to pay off your debt. The reasons you shouldn't keep your vehicle during Chapter 7 bankruptcy Keeping your car isn't always possible when you file Chapter 7 bankruptcy. Sometimes, it does not make financial sense 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 will play an important role. Car equity and bankruptcy Similar to a mortgage for the property equity is calculated by subtracting the amount you owe on your car loan from the vehicle's present market value. "For instance, if you own a car that has an appraised value of $10,000 and a 1,000 loan balance, you have equity of $9,000," says Rosenblum. In the event that your equity amount is higher than the exemption the bankruptcy trustee can opt to dispose of the car and apply the proceeds toward the repayment of your debts. It's not financially sensible to keep the car. Finally, it's also worth bearing in mind that if the car's fair market value is included in the loan and you want to keep the vehicle will not necessarily be a smart financial decision. "Very often it is the case that the loan amount is higher than the value of the vehicle and, if there is no way or the desire to keep the car, the bankruptcy filer will let go of the vehicle," says Michael Sullivan who is a personal financial advisor of the non-profit financial counseling agency Take Charge America. How to keep your car through 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 when you enter Chapter 13, you reorganize your debt." Making a payment plan As an element in Chapter 13 debt reorganization, a three- to five-year repayment plan will be developed which takes into account your earnings and assets. The purpose for the Chapter 13 process is to let you retain your possessions, which includes your vehicle, while paying off your debt. In addition, if you're late on your payments, the process will require you to make up the gap and pay on time moving forward. The conditions of the 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. If the terms are changed, the monthly installments will be less. "A rewrite of the debt owed to the lender could be done through a Chapter 13 plan, and market terms can be forced on a lender," says Hawkins. Reduce the loan amount altering auto loan conditions as part in Chapter 13 may also include what's known as the "cramdown," which reduces the amount you have to pay to the lender to the car's reasonable market value. The timing of your purchase of a car is an important factor in the process of cramdown. In particular, there is a rule of 910 that applies to Cramdowns. Newer vehicles If you purchased your car within 910 days of bankruptcy, then you have to pay the full value of the car loan, though your interest rate may be decreased. Older cars: If you purchased your car more than 910 days before filing bankruptcy then you're only required pay back the vehicle's fair market value. The reasons you shouldn't keep your car 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 has been in arrears and you don't have the money to bring the loan current or to pay the monthly installments. In this scenario, you may have to give up the vehicle. The vehicle is not in good condition or not reliable. In these conditions, giving up the car may be more sensible. The car is extremely valuable, and selling it could provide money in order to repay your obligations. You own a substantial equity in the car, which is greater than the bankruptcy exemption levels in the state you reside in. The most important thing to remember is Filing bankruptcy does not mean a car purchased with secured loan will be repossessed. Under the both Chapter 7 and Chapter 13 bankruptcy laws, there are provisions to protect your vehicle. Working with a bankruptcy attorney will help you determine which bankruptcy option 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 editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances by providing precise, well-studied information that breaks down otherwise complex subjects into bite-sized pieces.
Auto loans editor
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