Can I Keep My Car if I Declare Bankruptcy?
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In certain circumstances, you can keep your car even after you’ve declared bankruptcy. You’ll need to demonstrate that you can continue making your payments or work out a new payment plan with your lender or the courts.
If you’re struggling financially, declaring bankruptcy is often a last-resort decision. And if you move forward with it, your assets—including your car—could be affected. Whether you’ll be able to keep your car depends on the type of bankruptcy, your personal finances, and the type of car loan you have.
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What type of debt is a car loan?
A car loan is secured debt. Unlike other personal loans or credit cards, secured loans need collateral—an item offered to the lender to secure the loan. This provides the lender with more security, as they can keep the collateral if loan payments fall short.
In the case of a car loan, your car is the collateral. If you’re unable to make your loan payment and default, the lender is legally allowed to repossess the collateral on the loan. In this case, that means they can take your car.
Lenders are not required to give you notice of repossession and may sell your repossessed car to pay off your debt.
Key Takeaway Your car can be repossessed if you default on your loan payments.
What to do about your car loan bankruptcy
After bankruptcy, there are a few different options to deal with your automobile loan. These options assume the vehicle was a pre-bankruptcy loan with an outstanding balance.
While it may seem counterintuitive to keep any debt after filing for bankruptcy, keeping your car payments may be the only way to keep your vehicle.
First, it’s worth approaching your lender to see if they’re willing to negotiate. Some lenders will consider lowering your balance, preferring payment to a default. This will make the monthly payments lower and more manageable for your new financial situation.
Most lenders won’t be willing to negotiate (credit unions are the most likely to agree), but it’s always worth checking since this option can potentially save your vehicle from repossession.
Keep the car and continue making payments
The best option to keep your vehicle may be to continue making your current loan payments, even after bankruptcy.
You may not receive monthly statements after you file for bankruptcy, so you’ll need to stay on top of payments and keep in direct contact with the lender until the balance is paid. This option will keep the issue out of the courts, which can save time and hassle.
This choice is only valid if you have not signed a reaffirmation agreement with your lender, explained below.
Reaffirm your current car loan
After you declare bankruptcy, most lenders will require you to sign a reaffirmation agreement—a signed guarantee that you will pay off all or a portion of your remaining debt that may have been discharged or reduced by your bankruptcy case.
Since a car loan is a secured loan, not signing a reaffirmation agreement could lead to the repossession of your vehicle.
This court-approved, enforceable contract is filed with bankruptcy court. Many lenders will withhold payment reports and other necessary documentation until the agreement has been signed.
Redeem the car loan
While it carries certain risks, a car owner can motion to redeem the loan. This would lead you to paying the remainder of the loan (or the vehicle’s current market value) off in a single lump sum.
This would free you from debt and ensure that you don’t need to sign a reaffirmation agreement.
Redeeming your loan is a good option to consider if you’re close to paying off your loan—but it requires access to cash, which might be hard to come by if you’re dealing with bankruptcy.
Redeem the car loan with a new lender
Instead of signing a reaffirmation agreement with your current lender, it’s possible to redeem your car loan with a new lender. This process requires approval from the bankruptcy court.
In doing so, you may be able treduce the balance you owe based on the car’s current market value. For example, if the car is worth $15,000 but you still owe $20,000, you may be able to reduce your balance by the differential (in the case of this example, $5,000).
You’ll apply for this new loan amount with a new lender, which will need to be approved by the court. The original lender will then need to either accept or deny the new value of the car loan.
If approved, you’ll have a new lender with a lower balance, which may help you keep your vehicle.
Surrender the vehicle
If you’ve exhausted all your options, you may need to surrender your vehicle to the lender. This means you cannot pay and would rather give up the car than deal with any further financial issues related to this car loan debt.
The lender will probably sell your vehicle to cover what you owe. If the sale amount is less than you owe, the remaining "deficiency balance" will be eliminated by your bankruptcy filing.
Key Takeaway You can reduce what you owe based on the vehicle’s current market value.
How to deal with auto loans in Chapter 7 bankruptcy
Chapter 7 bankruptcy is known as liquidation. In a Chapter 7 bankruptcy, you forfeit assets to negate debts. One of these assets may be your vehicle.
The goal of a Chapter 7 bankruptcy is to revert your debt amount to zero. Unfortunately, this means that keeping your vehicle (and the accompanying debt) probably won’t be possible.
How to deal with auto loans in Chapter 13 bankruptcy
Unlike the clean slate of a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is a reorganization of your owed debt. In this case, you would repay the debt in a repayment plan decided on during your bankruptcy hearings.
You’ll likely be required to pay the value of any new loans—those less than 910 days—in full. But for older loans, you could get a reduced payment based on the fair market value of the car.
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Can I keep my car in a bankruptcy?
Sometimes. It will depend on the type of bankruptcy you declare, the agreements signed, and your finances. In some cases, keeping some debt and paying off your vehicle is the best decision.
Can I keep my car in a Chapter 13?
Yes, you can keep your car in a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy filing, your assets are not sold or repossessed to pay your lenders.
You’ll need to pay at least some of your debts to keep your car, though.
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