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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 mission is to help you make better financial decisions by offering 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 and 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 offers that appear on this site come from companies that compensate us. This compensation could affect how and when products are featured on this site, including the order in which they may be displayed within the listing categories in the event that they are not permitted by law for our mortgage home equity, mortgage and other products for home loans. But this compensation does affect the information we provide, or the reviews that appear on this website. We do not contain the entire universe of businesses or financial deals that may be open to you.
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5 min 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 editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to manage their finances through providing clear, well-researched information that breaks down complicated subjects into bite-sized pieces.
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If you’re considering the possibility of bankruptcy, there are options to help keep your car from being repossessed even if aren’t able to fully repay your auto loan. In some states, you might be able to stay away from repossession of your car through bankruptcy code exemptions, though the rules vary from state to state. Are you able to protect your vehicle by filing bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you might be able keep a vehicle that you bought with a secured loan.
How to preserve your vehicle through Chapter 7 bankruptcy Car loans are secured, which means the car is pledged as collateral to back the loan. Because the vehicle serves in the capacity of collateral it could be repossessed by the lender when you do not keep up with the payments. However in Chapter 7, the most frequent bankruptcy for individuals, you have a few alternatives to keep your vehicle. “To keep your car while you go through Chapter 7, the debtor has to be current and stay current with the lender or perform a’redemption,’ which involves making payments to the lender, or perform a ‘reaffirmation,’ which could mean changing the loan terms, but this requires lender consent,” says Lamar Hawkins an attorney for bankruptcy at Guidant Law. The following is how reaffirmation and the redemption process are done: Redemption: Obtaining redemption is a way to pay your creditors the vehicle’s current worth. If you’re able to make this happen it can make your life easier in the future because you’ll have eliminated car payments. However, because the majority of bankruptcy filings are made in a time where cash isn’t readily available, this may not be an option that is feasible. Reaffirm: This option permits you to make payments on your loan as before filing for bankruptcy. When you reaffirm your debt, you agree a second time to continue to pay according to a timetable set by both you and your lender, which may include revised loan terms. Tips from Bankrate
If neither of these options is a good fit for you financially You can also surrender your vehicle to the creditor and get the debt discharged.
“When you are granted a Chapter 7 Discharge, you won’t have any personal obligation to pay for this loan,” says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. “All the creditor has to do is take their collateralthe car. They cannot sue you for cash.” Bankruptcy exemptions When filing to file for Chapter 7, your assets are sold off or liquidated to pay creditors. But a bankruptcy court allows you to keep a specific amount of your property in excess of a specified dollar value, according to Debt.org. This is referred to as an “exemption.” This is the maximum federal exemption is $4,000. However, many States have their own exempt limit that must be followed Certain states’ exemptions are higher than $4,000, while others are less. The value of your car when you file bankruptcy does not depend on the price you paid for it. In most states, value is tied to the value of the car’s cash value depending on factors such as the year of the vehicle, its make and mileage. Car industry sources like Kelley Blue Book or Edmunds could be used to determine the worth of your vehicle. If your car’s current value is determined to be lower than the state’s exemption limits, then you will be allowed to keep the vehicle even while you’re filing bankruptcy. However when the vehicle is more valuable than the exemption limit, a bankruptcy trustee may opt to offer the car for sale in order to you pay off your creditors. The way it works is: If your state’s exemption is $4,000 and your car’s worth is $2,000, then you will likely be allowed to keep the car because it’s value is less than the exemption. If however the exemption for your state is $4,000, and your car is worth $10,000, the bankruptcy trustee can take the car off the market and make use of the funds to pay off debt. The reasons you shouldn’t keep your car during Chapter 7 bankruptcy Keeping your car isn’t always possible when you file Chapter 7 bankruptcy. In some cases, it doesn’t make sense financially to hang on to the car. In deciding these issues the value of your vehicle and the equity in the car are crucial factors. Car equity and bankruptcy Similar to a mortgage for a home equity is determined by subtracting what you still owe on the car loan from the present market value. “For example, if own a car that has an appraised value of $10,000 with a $1,000 loan balance, you have equity of $9,000,” says Rosenblum. When the equity value is higher than the exemption that a bankruptcy trustee may opt to dispose of the car and put the proceeds towards paying off your debts. It’s not economically sensible to keep the car. Finally, it’s also worth bearing in mind that if the vehicle’s value at the moment is included in the loan and you want to keep the car will not be a smart financial decision. “Very often it is the case that the loan amount is higher that the worth of the car, and without the means or desire to keep the car, the person filing bankruptcy lets it go,” says Michael Sullivan an expert in personal finance with the nonprofit financial counseling firm Take Charge America. How to keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number 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.” The process of creating the payment plan is a component the Chapter 13 debt reorganization, the three-to-five-year repayment plan will be developed that takes into consideration your earnings and assets. The purpose of this Chapter 13 process is to enable you to keep your possessions, such as your car, while paying off your debt. If you’re in a position to fall behind in your payments, the program will need you to catch up and pay your debt on time going forward. Revising the conditions for your loan The court could also order that the lender amend the car loan terms, including lower interest rates, this is another method to aid in keeping the car. The terms will be revised, and the monthly installments will be lower. “A Rewrite of the debt due to the lender can occur by way of the Chapter 13 plan, and market terms may be imposed on a lender,” says Hawkins. Reduce the loan amount changing auto loan terms in the context of Chapter 13 may also include what’s called”cramdown. “cramdown,” which reduces the amount you must pay to the lender according to the vehicle’s fair market value. The timeline of your purchase of a car is an important factor in the cramdown process. In particular, there’s a 910 rule that applies to Cramdowns. Newer vehicles: If you bought your vehicle within 910 days of bankruptcy application, you are required to repay the full amount of the loan however, the rate of interest may be decreased. Older vehicles: If you bought your car after 910 days before filing for bankruptcy You’re only required to pay back the vehicle’s actual market value. There are a variety of reasons why you should not keep your car in Chapter 13 bankruptcy In certain circumstances, it may not be feasible to keep your vehicle when you are pursuing Chapter 13, or hanging on to your car might not be the best option. The scenarios where this could hold true include: The loan is in arrears and you do not have the funds for bringing the loan up to date or to make ongoing monthly payments. In this scenario, you may have to sell the car. The car isn’t in good shape or is not reliable. In these situations, selling the car could make more sense. The car is highly valuable, and selling it would provide cash in order to repay your debts. There is a significant equity stake in the car that exceeds the bankruptcy exemption levels in the state you reside in. The final result Filing bankruptcy does not mean a car purchased with a secured loan can be taken away. In each of the Chapter 7 and Chapter 13 bankruptcy codes, provisions protect your vehicle. A bankruptcy lawyer 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 from late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing concise, well-studied and well-researched content that breaks down otherwise complex topics into digestible chunks.
Auto loans editor
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