What Happens to Car Loans in A Bankruptcy?

There are several issues to consider in answering this question. The most critical issue is the value of your car. In most cases, you can protect your car using the allowable bankruptcy code exemptions. An exemption allows you to file for bankruptcy relief and protect some of your property.

The bankruptcy courts understand you need a car to get to work and to pick your kids up from school. As long as you aren't driving an antique classic car, you will likely be able to keep your car in a bankruptcy filing. 

Many states allow debtors to elect bankruptcy code exemptions. In those states, debtors get their choice between the federal exemptions and those in their state's law. Only state exemptions can be selected for the balance of the states.

The exemption laws vary significantly from state to state. You need to consult a seasoned bankruptcy lawyer for the list of exemptions available to you. The next question is whether you have a clear title to your car. If you have pledged your vehicle as security for a debt, or if you are financing or leasing a vehicle, you have three options for secured car loans when you file for Chapter 7 bankruptcy.

Car Loans in Chapter 7 Bankruptcy

Reaffirm

A reaffirmation agreement is a contract between you and the car creditor in which you agree to pay the balance owed on your car note, despite the bankruptcy filing. You continue to make payments, and the creditor promises that, as long as payments are made, the creditor will not repossess or take back the property. Reaffirmed debts are not discharged, and the debt survives the bankruptcy.

If you do not make your car payments after you reaffirm the car loan, the car lender can repossess the car and sue you for the deficient balance. After the finance company repossesses the car, they will sell the car at the auto auction. Usually, the finance company does not get enough money from the auction to pay off your loan. This shortfall is called a "deficiency," and you would still be legally obligated to pay the creditor the deficiency balance. 

As you can see, the decision to reaffirm your car loan is a serious financial matter. Reaffirmation agreements are strictly voluntary. You are not required by the Bankruptcy Code or other state or federal law to reaffirm your car loan. Before entering such an agreement, you will want to speak to a bankruptcy attorney to ensure that the reaffirmation is in your best interest.

Redeem

In Chapter 7, you have the right to purchase or redeem your car from the creditor by making a lump sum payment equal to the car's fair market value. The 2005 bankruptcy code provides that you must pay the creditor the replacement retail cost of the car. The balance of the debt will be discharged. For example, assume you own a car worth $5000.00 but owe the finance company $10,000.00.

In this circumstance, you could redeem the vehicle by paying the creditor $5000.00, and the remaining balance will be discharged in your bankruptcy. A local bankruptcy attorney can advise you on the benefits of redeeming your financed car and identifying lenders that will provide the funds for your vehicle redemption.

Surrender

If you cannot afford the monthly payments on your car loan, or if you determine that you owe more than the car is worth, you can unload the car and the debt in your Chapter 7 bankruptcy by surrendering the vehicle to the creditor.

Car Leases in Chapter 7 Bankruptcy

If you are leasing your car when you file Chapter 7 bankruptcy, you can either continue making the monthly lease payments or surrender the car back to the creditor. If you surrender the leased car, any obligation under the lease will be eliminated in your Chapter 7 bankruptcy case.

Car Loans in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a powerful tool to protect your car from repossession. If you have fallen behind on your car payments, you can file a Chapter 13 bankruptcy to stop the repossession of your vehicle. The amount you have to pay for your car depends upon when you bought your car.

910 Claims

You must repay the entire car loan if you bought your vehicle within 910 days of filing your bankruptcy case. The good news is that the interest rate you pay on your car loan may be significantly reduced. For example, if you owed $10,000 on a car loan whose blue book value was only $5000, you would be required to pay the entire $10,000 balance if the car was purchased less than 30 months, or 910 days, of filing. In short, debtors who want to keep their cars must pay the total loan amount rather than "cram down" the debt to the car's value.

Cram Down

If you bought your car more than 910 days before filing for bankruptcy, you would only have to repay an amount equal to the car's present value. For example, if you owed $5000 on a car worth only $2500, upon filing Chapter 13, you would be required to repay the finance company only $2500 over the three to five-year term of your Chapter 13 repayment plan.

Car Leases in Chapter 13 Bankruptcy

Your car lease cannot be paid through the Chapter 13 bankruptcy repayment plan that you devise with your bankruptcy attorney. You can "assume" the lease and continue making the monthly payments. You can "reject" the lease and return the car to the creditor. The creditor will sell the leased vehicle, apply the sale proceeds to your lease balance and then file a claim in your Chapter 13 bankruptcy case for the lease deficiency. This deficiency is an unsecured, non-priority claim, which means you will likely only pay that creditor pennies on the dollar.

Article Author: TotalBankruptcy.com offers attorneys nationwide to help you understand or file for bankruptcy. If you are in too deep and decide that credit counseling, debt consolidation, or debt settlements won’t help you, contact TotalBankruptcy for a free consultation.