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How to file for bankruptcy and keep your car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by offering interactive tools and financial calculators that provide objective and original content. We also allow users to conduct research and compare information at no cost to help you make financial decisions with confidence. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this website are provided by companies that compensate us. This compensation may impact how and when products are featured on the site, such as for instance, the order in which they may be displayed within the listing categories and other categories, unless prohibited by law for our mortgage, home equity and other home lending products. But this compensation does have no impact on the information we provide, or the reviews that you see on this site. We do not contain the entire universe of businesses or financial deals that may be open to you.
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5 min read Published March 20, 2023
Written by Mia Taylor Written by Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to manage their finances by providing clear, well-researched information that break down complex topics into digestible chunks.
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If you’re thinking of doing so alternatives, there are some to help keep your car from being taken away even if aren’t able to fully repay the auto loan. In many states, you may be able to stay away from repossession of your vehicle by using bankruptcy code exemptions. However, the rules vary from state to state. Are you able to protect your vehicle by filing bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you might be able keep a vehicle that you bought using a secured loan.
How to keep your car by filing Chapter 7 bankruptcy Car loans are secured by the vehicle, which means that it is pledged as collateral in order to secure the loan. Since the car is used as collateral, it could be taken away by the lender in the event that you fail to maintain payments on the debt. However under Chapter 7, the most popular bankruptcy for individuals, you have a few options to hold on to your vehicle. «To keep a vehicle while being in Chapter 7, the debtor has to be current and current with the lender or perform a’redemption that involves making payments to the lender or executing an ‘affirmation’ that can involve changing the loan conditions, however this is subject to lender approval,» says Lamar Hawkins an attorney for bankruptcy at Guidant Law. Here’s how redemption and reaffirmation are done: Redemption: Obtaining redemption involves to your creditor the vehicle’s current fair market value. If you can afford to do this, it may make things easier later on because you’ll have eliminated car payments. But because most people file for bankruptcy at a time when cash is not readily available it’s not an option for you. Reaffirmation: This option permits you to continue making payments on your loan as before filing for bankruptcy. When you reaffirm your debt, you sign a new agreement to make payments according to a timetable set by both you and your lender and may also include revised loan terms. Bankrate tip
If neither option is working for you financially You can also surrender your vehicle to the creditor and have the debt eliminated.
«When you get a Chapter 7 Discharge, you are no longer liable for personal responsibility to pay your loan,» says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. «All the creditor is able to do is seize their collateral- your car. They cannot take you to court for money.» The bankruptcy exemptions when filing for Chapter 7, your assets are liquidated or sold to pay your creditors. However, a bankruptcy court permits the holder to retain a certain amount of your possessions in excess of a specified monetary value, according to Debt.org. This is called»exemption. «exemption.» This is the federal exemption limit is $4,000. However, many states set their own limit which must be followed Certain states’ exemptions are higher than $4,000 while some are less. What you can expect to receive for your vehicle when you file bankruptcy is not based on what the price you spent on it. In many states, the value is determined by the actual value of the vehicle based on such factors as the car’s year, make and mileage. Sources from the automotive industry like Kelley Blue Book or Edmunds can also be used to help determine the worth of your vehicle. If the value of your vehicle is determined to be lower than your state’s exemption limits, then you’ll be able to keep the vehicle even when you file for bankruptcy. In contrast in the event that the car is more valuable than the exemption, bankruptcy trustees may decide to offer the car for sale to help repay your debts. Here’s how it works If the exemption for your state is $4,000, and your vehicle’s value is $2,000, you’ll likely be able to keep the vehicle because it’s less valuable than the exemption. If, on the other hand the exemption in your state is $4,000 and your vehicle is worth $10,000, then the bankruptcy trustee could sell the car and make use of the funds to pay off debt. Reasons you wouldn’t keep your car in Chapter 7 bankruptcy Keeping your vehicle may not be feasible in the event of filing Chapter 7 bankruptcy. In some cases, it doesn’t make sense financially to hang on to the vehicle. In the process of deciding on these issues, the value of your car as well as your equity in the vehicle play a key role. Equity in the car and bankruptcy similar to a mortgage for a home equity is determined by subtracting what you still owe on the car loan from the vehicle’s actual market price. «For example, if own a car that has an appraised value of $10,000, and an outstanding $1000 loan balance, you have $9,000 equity,» says Rosenblum. In the event that your equity amount is higher than the exemption, a bankruptcy trustee could opt to dispose of the car and apply the proceeds toward paying off your debts. It’s not economically sensible to keep the car. Lastly consider keeping in mind that if your vehicle’s current fair market value is reflected on the car loan, then keeping the car won’t necessarily be a good financial choice. «Very often, the loan balance is greater that the worth of the car, and without the means or motivation to keep the car the person filing bankruptcy lets it go,» says Michael Sullivan who is a personal financial advisor with the nonprofit financial counseling company Take Charge America. How do you keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options to keep your vehicle. «The Chapter 7 framework is the basis for Chapter 13,» says Rosenblum. «But when you enter Chapter 13, you reorganize your debt.» Making a payment plan As component the Chapter 13 debt reorganization, a three- to five-year repayment plan is created which takes into account your income and assets. The purpose for this Chapter 13 process is to enable you to keep your possessions, such as your car, and pay off your debt. In addition, if you’re late on payments, the plan will oblige you to make up the gap and pay on time moving forward. Revising the terms for your loan The court may also require that the lender revise the car loan conditions, such as lower interest rates, which can aid in keeping the vehicle. With revised terms, the monthly payments will be lower. «A rewrite of the debt owed to the lender can occur via the process of a Chapter 13 plan, and market conditions can be imposed on the lender,» says Hawkins. The reduction of the loan amount altering your auto loan terms in the context the process of Chapter 13 may also include the process known as the «cramdown,» which reduces the amount you must pay to the lender to the car’s fair market value. The timeframe of your car purchase is an important factor in the cramdown process. In particular, there is the 910 rule which applies to Cramdowns. Newer vehicles If you purchased your car within 910 days of your bankruptcy, then you have to be able to pay the entire amount of the loan however, your interest rate may be reduced. Older vehicles: If you purchased your vehicle more than 910 days before filing bankruptcy, you’re only required to pay back the vehicle’s reasonable market price. Reasons you wouldn’t keep your car during Chapter 13 bankruptcy In certain situations, it might not be possible to keep your car while trying to file for Chapter 13, or hanging on to it may not be the best option. Some instances where this might hold true include: The loan has been in arrears, and you do not have the funds to bring the loan current or to continue making monthly payments. In this scenario it is possible to surrender the vehicle. The car is not in good shape or is unreliable. In these situations, selling the car could be a better option. The car is particularly valuable, and selling it would provide cash in order to repay your debts. There is a significant equity stake in the car that surpasses the bankruptcy exemption thresholds in the state you reside in. The final result Filing bankruptcy does not guarantee that a vehicle purchased through a secured loan can be taken away. Under both Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. A bankruptcy lawyer can help you decide which approach to bankruptcy is the best option for your financial situation.
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Written by a Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to control their finances by providing clear, well-researched information that break down complicated topics into digestible chunks.
Auto loans editor
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