What Happens to My Car Loan During Bankruptcy?

Filing for bankruptcy can raise questions about your car loan. You may worry about losing your car or dealing with your lender. The outcome depends on the type of bankruptcy you file and your specific situation. Understanding your options can help you make informed decisions.

Chapter 7 Bankruptcy and Car Loans

Chapter 7 bankruptcy, also known as liquidation bankruptcy, discharges unsecured debts. However, car loans are secured debts. This means the lender can repossess your car if you don’t make payments. In Chapter 7, you have three main options for handling your car loan:

• Reaffirm the Loan: This means you agree to continue making payments on the car. You’ll need to sign a reaffirmation agreement, which keeps you liable for the debt. Reaffirming is a good option if you can afford the payments and want to keep your car.
• Redeem the Car: Redemption allows you to pay the lender a lump sum equal to the car’s current value. If your car is worth less than what you owe, this can be a cost-effective choice. However, you’ll need access to enough money to make the payment.
• Surrender the Car: If you can’t afford the loan, you can return the car to the lender. The remaining balance on the loan will be discharged. Surrendering the car can help you avoid future financial strain.

Chapter 13 Bankruptcy and Car Loans

Chapter 13 bankruptcy involves a repayment plan. This plan lasts three to five years and helps you catch up on missed payments. It can also allow you to adjust the terms of your car loan.

One advantage of Chapter 13 is the ability to “cram down” a car loan. This reduces the loan balance to match the car’s current value. Cramdowns are only available for cars purchased more than 910 days before filing bankruptcy. The court may also reduce your interest rate, making payments more affordable.

During the repayment plan, you’ll make monthly payments to a bankruptcy trustee. The trustee distributes these funds to your creditors, including your car lender. As long as you stay current with your plan, you can keep your car.

What Happens to Missed Payments?

If you’ve fallen behind on car payments, bankruptcy can help. Chapter 7 can wipe out the debt if you surrender the car. Chapter 13 lets you include missed payments in your repayment plan. This gives you time to catch up without worrying about repossession.

Protecting Your Car in Bankruptcy

Your ability to keep your car may depend on its value and your state’s exemptions. Bankruptcy exemptions protect certain assets, including vehicles, from liquidation. If your car’s equity is covered by the exemption, you’re more likely to keep it.

Consult a Bankruptcy Attorney

Navigating car loans during bankruptcy can be complex. A bankruptcy attorney can explain your options and help you make the best choice for your situation. They’ll ensure all paperwork is filed correctly and deadlines are met.

If you’re struggling with a car loan and considering bankruptcy, don’t wait. Contact us and we’ll guide you through the process and help you protect your financial future.