How to protect your car loan in bankruptcy

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If you are considering In the event of bankruptcy, there are options that can help prevent repossession of your vehicle, even if you have not fully repaid the secured loan used to purchase the car. In many states, you may be able to avoid repossession of your car through bankruptcy code exemptions, although laws vary from state to state.

Chapter 7 and Chapter 13 bankruptcy include provisions where you may be able to keep a car you purchased with a secured loan.

How to Keep Your Car During Chapter 7 Bankruptcy

Car loans are secured debt, which means the car is given as collateral to secure the loan. Because the car serves as collateral, it can be repossessed by the lender if you fail to maintain payments on the debt. However, under Chapter 7, which is the most popular bankruptcy for individuals, you have several different options to hold onto your vehicle.

“To keep a vehicle while going through Chapter 7, the debtor must be current and stay current with the lender, complete a ‘redemption’ which involves repaying the lender, or complete a ‘reaffirmation’, which may involve to change the terms of the loan, but this requires the consent of the lender,” explains Lamar Hawkins, bankruptcy attorney at Guidant Law.

Here’s how redemption and reaffirmation work:

  • Redemption: Pursuing redemption involves make a lump sum payment to your creditor for the current fair market value of the car. If you can afford to do this, it may make your life easier in the future, as you will have completely eliminated car payments. But since most people declare bankruptcy at a time when money is not readily available, this may not be a viable option for everyone.
  • Reaffirm: This option essentially allows you to continue making payments on your loan as you did before declaring bankruptcy. By reaffirming your debt, you agree a second time to continue making payments according to a schedule agreed between you and your creditor, which may include revised loan terms.

Of course, if neither pursuing payments nor buying back the car works for you financially, you can also choose to simply hand over your vehicle to the creditor and have the rest of your debt paid off.

“When you get a Chapter 7 discharge, you will no longer have personal responsibility to pay the loan,” says Dai Rosenblum, a Pennsylvania-based bankruptcy attorney. “All the creditor can do is take their collateral – your car. They can never sue you for money.

Reasons You Wouldn’t Keep Your Car During Chapter 7 Bankruptcy

Keeping your car isn’t always possible when filing for Chapter 7 bankruptcy and sometimes it just doesn’t make financial sense to try to keep the vehicle. When sorting through these questions, the value of your car and your equity in the car play a key role.

Car value and bankruptcy exemptions

The value of your vehicle when filing for bankruptcy is not based on the price you paid at the time of purchase. In most states, the value is tied to the actual value of the car based on factors such as the car’s year, make, and mileage. Automotive industry sources like Kelley Blue Book or Edmunds can also be used to help determine the value of your vehicle.

When filing Chapter 7, your assets are liquidated or sold to pay creditors. But a bankruptcy court allows you to keep a certain amount of your property up to a specific monetary value, according to Debt.org. This is called an “exemption”. The federal exemption level is $4,000. However, many states have their own exemption limit that must be adhered to – some states’ exemptions are over $4,000, while others are lower.

If it is determined that the current value of your car is less than your state’s exemption rate, you will be allowed to keep the car even if you are bankrupt. On the other hand, if the car is worth more than the exemption, a trustee in bankruptcy may choose to sell the car to help pay your creditors.

Here’s how it works: If your state’s exemption is $4,000 and your car’s value is $2,000, you’ll likely be allowed to keep the vehicle because its value is less than the exemption. If, on the other hand, your state’s exemption level is $4,000 and your car is worth $10,000, a trustee in bankruptcy can sell the car and use the proceeds to pay off the debt.

Automotive Equity and Bankruptcy

Another consideration in bankruptcy filings is the equity you have in a vehicle with an outstanding loan. Similar to a mortgage on a home, equity is determined by subtracting what you still owe on the car loan from the current market value of the car.

“For example, if you have a car with a fair market value of $10,000 with a loan balance of $1,000, you have $9,000 of equity,” says Rosenblum.

If the equity is greater than the exemption, a trustee in bankruptcy could choose to sell the car and use the proceeds to pay off your debts.

It doesn’t make financial sense to keep the car

Finally, it should also be borne in mind that if the current fair market value of your vehicle is less than you owe on the car loan, then keeping the vehicle will not necessarily be a wise financial decision.

“Very often the loan balance is more than the value of the car, and without the means or the desire to keep the vehicle, the declarant lets it go,” says Michael Sullivan, personal financial consultant with the consultancy firm. nonprofit financier Take Charge America. .

How to Keep Your Car During Chapter 13 Bankruptcy

Similar to Chapter 7, there are various options available through Chapter 13 that allow you to keep your car.

“The framework of Chapter 7 is the basis of Chapter 13,” says Rosenblum. “But in Chapter 13, you reorganize your debt.”

Create a payment plan

As part of Chapter 13 debt reorganization, a three to five year repayment plan will be developed taking into account your income and assets. The purpose of the Chapter 13 process is to allow you to keep your assets, including your car, while paying off your debt. Additionally, if you fall behind on your payments, the plan will force you to catch up and make timely payments in the future.

Revise loan conditions

The court can also require the lender to review the terms of the car loan, including lowering the interest rate, which is another way to help you keep the car. With revised terms, monthly payments will be lower.

“A write-back of debt owed to the lender can occur through a Chapter 13 plan, and market conditions can be imposed on a lender,” Hawkins says.

Reduce loan balance

The process of changing auto loan terms under Chapter 13 can also include what’s called a “cramdown,” which reduces the amount you have to pay the lender to the fair market value of the car. The timeline of your car purchase is an important factor in a cramdown. In particular, there is a 910 rule that applies to cramdowns.

  • Newer cars: If you bought your car within 910 days of filing for bankruptcy, you must pay the full value of the car loan, although your interest rate may be reduced.
  • Older cars: If you purchased your car more than 910 days before filing for bankruptcy, you are only required to pay off the current fair market value of the car.

Reasons You Wouldn’t Keep Your Car During Chapter 13 Bankruptcy

In some circumstances, it may not be possible to keep your vehicle while chasing Chapter 13, or it may not make sense to hang onto the car. Here are examples of when this may be true:

The loan is past due and you don’t have the financial means to actualize the loan or the ability to make ongoing monthly payments. In this case, you may have to give up the vehicle.

the the vehicle is not in good condition or is unreliable. In these circumstances, it may make more sense to simply ditch the car.

  • the the car is particularly valuable and selling it would provide money to pay off your debts.
  • You have significant capital in the vehiclethat exceeds the bankruptcy exemption levels in your state.

The bottom line

Filing for bankruptcy does not automatically mean that a car purchased with a secured loan will be repossessed. Under the Chapter 7 and Chapter 13 bankruptcy codes, there are provisions that protect your car. Working with a bankruptcy attorney can help you decide which approach to bankruptcy makes the most sense for your financial situation.

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