Filing for bankruptcy may seem like a last-resort option when you’re struggling financially, but it’s important to be aware that your assets may be impacted during the bankruptcy process. This includes items such as your vehicle.
For many people, personal loans are a more secure way to borrow money than using credit cards. With a personal loan, you typically put up collateral, such as your car, to secure the loan. This means that, should you default on the loan, the lender can legally repossess your collateral.
Cars are a vital part of many people’s lives, whether they use them for commuting to work or taking care of an elderly parent. That’s why it’s important to know that you can keep your car even during bankruptcy.
Bankruptcy Options For Car Loans
You may have a few options available to you if you have an outstanding balance on your car loan before declaring bankruptcy.
1. You Should Reaffirm Your Current Car Loan
In bankruptcy, there are two different positions that creditors can take with car loans. The majority of them require that you sign a reaffirmation agreement that is approved by the court. This agreement is legally binding and filed with the bankruptcy court. It states your promise to repay all or part of a debt that would otherwise be discharged in your bankruptcy case.
Many lenders require that you sign an agreement before they will provide you with statements or report payments to the credit bureau. In many cases, failure to sign this agreement is considered a breach of the loan terms and may result in repossession of the vehicle.
Outcome: Signing the reaffirmation agreement means you can keep your car.
Who this is ideal for: Some people are confident that they will be able to make their loan payments on time.
How to do it: You have 60 days from your first meeting with creditors to reaffirm your debt. The creditor must agree to the reaffirmation and it must be filed with the court.
2. Make Payments On The Car And Keep It
You don’t have to sign a reaffirmation agreement to keep making payments on your loan. Just make sure your payments are current, and you may not get monthly statements after filing for bankruptcy. You’ll need to call the lender to find out when the balance is paid off.
Outcome: Don’t worry about your car.
Who this is ideal for: Different people have different levels of income. Some people are more disciplined than others when it comes to making loan payments.
How to do it: Speak with your lender to see what options are available to you regarding early repayment of your loan.
3. Find A New Lender To Redeem The Car Loan
Bankruptcy law permits a car owner to reduce the current car balance to the car’s fair market value. This can be done by taking out a new loan with a different lender. For example, say you owe $15,000 on your car loan and the car is only worth $10,000. You may be able to reduce your car balance by $5,000 with a new post-bankruptcy loan. To apply for this loan, you will need to get judicial approval.
You and your car lender will likely have different opinions on what your car is worth. You may be able to negotiate a settlement between yourselves, or you may have to wait for a judicial decision on fair market value.
Outcome: Even though your current lender may not be willing to work with the new car loan value, other lenders may be more flexible.
Who this is ideal for: Many people choose to trade in their car when they owe more money on the loan than the car is worth.
How to do it: Applying for a loan with a new lender is the best way to get judicial approval for redemption. Submitting a motion to redeem, along with the new loan offer, is all that is needed to get started.
4. Contact The Lender Directly And Negotiate
It is possible to negotiate with some lenders to lower the balance of your loan to the fair market value of the vehicle without needing to redeem it. Credit unions are more likely than other types of lenders to offer this service. However, most lenders will not be willing to do this. It is still worth inquiring with your lender once you have filed for bankruptcy.
You must keep your car payments current at all times unless you are planning to surrender the vehicle.
Outcome: As long as can keep up with the payments, there’s a chance we can keep the car.
Who this is ideal for: For many people, their car is essential to their livelihood. Keeping up with car payments can be difficult, but it’s even harder when you’re facing bankruptcy.
How to do it: Reach out to your lender as soon as possible to explain your circumstances. Be prepared to show documentation of your income and expenses, as well as a plan for how you will make future payments.
5. Return The Vehicle To The Owner
Once you have decided to file for bankruptcy, you will need to take some important steps to protect your assets. One option is to surrender your vehicle directly to the lender. Make sure to get something in writing that proves you have done this. Keeping your car insurance up-to-date is also important while the car is in your possession. You don’t want to add more financial problems by having a car accident after you have filed for bankruptcy.
Surrendering your car to the lender usually results in the sale of the car for an amount that is less than what is owed on the loan. This remaining balance called a “deficiency balance,” can be eliminated through bankruptcy.
Outcome: You give up the vehicle.
Who this is ideal for: Many people cannot afford to keep a car or make car payments.
How to do it: To avoid repossession, immediately take your vehicle back to the lender and get a written confirmation that you have surrendered the car.
Chapter 13 Bankruptcy And Auto Loans
There are several ways to keep your car when you declare bankruptcy. The option that is available to you depends on the type of bankruptcy you file.
In Chapter 13 bankruptcy, your debt is reorganized and you make payments on a repayment plan. The amount you pay back on a car loan depends on how old the loan is.
- Newer car loans. The full value of your car loan must be paid off within 910 days unless you file for bankruptcy. In that case, there is a chance the interest rate could be reduced, which would lower your monthly payments.
- Older car loans. Prorated car payments may be an option for you depending on how old your car loan is. After 910 days, the courts could give you a payment amount that is based on the fair market value of your car.
Auto loan payments can be a burden, especially when you’re already behind. But don’t despair – there may be an opportunity to work out an additional financial arrangement with your auto lender.
Bankruptcy Chapter 7 Auto Loans
There are five different options that people who have car loans can consider when they are struggling to make payments. These options include refinancing, selling the car, voluntarily surrendering the car, and filing for either Chapter 7 or 13 bankruptcy. Each option has its own set of pros and cons that should be carefully considered before making a decision.
- Reaffirming the debt.
- Redeeming the car.
- Continuing repayment to make the loan current.
- Renegotiating the loan terms with the lender.
- Surrendering the car.
The goal of Chapter 7 bankruptcy is to get your debt down to a manageable level. Depending on your situation, you may or may not be able to keep your vehicle in the process.
There is nothing easy about bankruptcy, but it may be possible to find a more manageable debt situation after you’ve filed for bankruptcy protection. Your options will vary depending on your circumstances, so be sure to consult with your bankruptcy attorney to determine the best approach for your particular case.