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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 better financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information at no cost to help you make informed financial decisions. Bankrate has agreements with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this website are provided by companies that pay us. This compensation can affect the way and where products are displayed on this site, including for instance, the sequence in which they be displayed within the listing categories in the event that they are not permitted by law. Our mortgage, home equity and other home lending products. However, this compensation will have no impact on the content we publish or the reviews that appear on this website. We do not include the entire universe of businesses or financial offerings that could be open to you.
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5 minutes read. Published March 20, 2023
Authored 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.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to control their finances by providing concise, well-researched and well-researched content that break down complex subjects into bite-sized pieces.
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If you’re considering , there are options that can help you keep your car from being repossessed even if haven’t fully repaid your auto loan. In several states, you could be able avoid repossession of your car through bankruptcy code exemptions, though the laws differ between states. Are you able to protect your vehicle by filing bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you could be able to keep a car that you purchased with secured loan.
How to preserve your vehicle through 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 in the capacity of collateral it could be taken by the lender if you fail to maintain payments on the debt. However under Chapter 7, the most popular bankruptcy for individuals there are a variety of options to hold on to your vehicle. «To maintain a car when going through Chapter 7, the debtor has to be current and stay up to date with his lender and perform a’redemption,’ which involves paying back the lender or executing an ‘affirmation’ that could mean altering the loan terms, but this is subject to lender approval,» says Lamar Hawkins, a bankruptcy attorney with Guidant Law. The following is how reaffirmation and the redemption process work: Redemption: Pursuing redemption involves to your creditor for the car’s actual reasonable market value. If you’re able to do this, it may make life easier later on because you’ll be able to eliminate car payments. But because most bankruptcy filings are made in a time where cash is not readily available and available, this might not be an option that is feasible. Reaffirmation: This option permits you to make payments on your loan prior to filing for bankruptcy. By reaffirming your debt you agree to continue making payments in accordance with a plan agreed upon by both you and your lender and may also include revised loan conditions. Tips from Bankrate
If neither of these options is a good fit for your financial situation You can also surrender your vehicle to the creditor and have the debt wiped off.
«When you receive the Chapter 7 Discharge, you are no longer liable for personal obligation to pay for your loan,» says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. «All the creditor can do is take their collateral -that is, your vehicle. They can never take you to court for cash.» The bankruptcy exemptions when you file in Chapter 7, your assets are sold or liquidated to pay creditors. The bankruptcy court will allow that you keep specific amount of your assets in excess of a specified amount of money, as per Debt.org. This is called»exemption. «exemption.» It is a federal exemption limit. federal exemption limit is $4,000. However, some states have their own exemption limit which must be followed Certain states’ exemptions exceed more than $4,000 while some are lower. What you can expect to receive for your vehicle when you file bankruptcy is not determined by the amount the price you spent on it. In the majority of states, value is tied to the value of the car’s cash value based on such factors as the car’s year, make and mileage. Car industry sources like Kelley Blue Book or Edmunds could be utilized to determine the worth of your vehicle. If your car’s current value is determined to be lower than the state’s exemption limit, then you’ll be permitted to keep your car when you file for bankruptcy. However when the vehicle is worth more than the exemption limit, a bankruptcy trustee may opt to offer the car for sale in order to pay your creditors. Here’s how it works If the state’s exemption is $4,000, and your vehicle’s value is $2,000, you will likely be allowed to keep the vehicle since it’s value is less than the exemption. If you’re on the other side, your state’s exemption level is $4,000 and your car is valued at $10,000, a bankruptcy trustee may take the car off the market and utilize the profits to pay off your debt. The reasons you shouldn’t keep your vehicle during Chapter 7 bankruptcy Keeping your vehicle may not be feasible in the event of you file Chapter 7 bankruptcy. In some cases, it isn’t financially feasible to try and hang on to the vehicle. When sorting through these questions the worth of your car and your equity in the vehicle play a key role. Equity in the car and bankruptcy similar to a mortgage on a home, equity is determined by subtracting the remaining amount owe on the car loan from the present market value. «For example, if you own a vehicle with an estimated fair market value of $10,000 and the $1,000 loan balance, you’ll have equity of $9,000,» says Rosenblum. When the equity value is higher than the exemption the bankruptcy trustee can opt to dispose of the car and use the proceeds towards paying off your debts. It’s not economically sensible for you to hold on to the car.. Lastly you should keep to your mind your vehicle’s current fair market value is reflected on the car loan then keeping the car will not be a wise financial move. «Very often it is the case that the loan amount is higher than the value of the vehicle and, if there is no way or motivation to keep the car the bankruptcy filer will let go of the vehicle,» says Michael Sullivan an expert in personal finance working with the non-profit financial counseling company Take Charge America. How to keep your car through Chapter 13 bankruptcy Chapter 13 bankruptcy also gives you several options to keep your vehicle. «The Chapter 7 framework is the foundation for Chapter 13,» says Rosenblum. «But in Chapter 13, you reorganize your debt.» Making the payment plan is a part the Chapter 13 debt reorganization, a three- to five-year repayment plan will be created that takes into consideration your earnings and assets. The purpose for this Chapter 13 process is to allow you to keep your possessions, such as your car, and pay off your debt. If you’re in a position to fall behind in your payments, the program will require you to catch up and pay your debt on time going forward. Revision of the conditions of your loan The court could also demand that the lender revise the car loan terms, including lowering the interest rate, which is another way to help you keep the car. If the terms are changed, the monthly installments will be lower. «A restructuring of the debt owed to the lender could be done via the process of a Chapter 13 plan, and market terms can be forced on a lender,» says Hawkins. Reduce the loan balance altering your auto loan terms in the context of Chapter 13 may also include what’s called»cramdown. «cramdown,» which reduces the amount you pay the lender in proportion to your car’s fair market value. The timeframe of your purchase of a car is a significant factor when it comes to the cramdown process. In particular, there is a rule of 910 that applies to Cramdowns. Newer cars: If you bought your vehicle within 910 days after your bankruptcy, then you are required to pay the full value of the loan however, the interest rate could be reduced. Older cars: If purchased your vehicle more than 910 days prior to filing for bankruptcy You’re only required to pay the current actual market value. There are a variety of reasons why you should not keep your vehicle during Chapter 13 bankruptcy In certain circumstances, it may not be possible to keep your car when pursuing Chapter 13, or hanging on to it may not be a good idea. Examples of when this may apply include: The loan is in arrears and you don’t have the money in order to make the loan current or to continue making monthly payments. In this situation, you may have to surrender the vehicle. The car isn’t in good shape or is not reliable. In these conditions, surrendering the vehicle could be a better option. The car is particularly valuable and selling it could provide cash in order to repay your outstanding debts. You own a substantial equity in the car that is greater than the bankruptcy exemption levels in your state. The most important thing to remember is Filing bankruptcy doesn’t automatically mean that a car bought with a secured loan can be taken away. In each of the Chapter 7 and Chapter 13 bankruptcy laws, there are provisions to protect your vehicle. A bankruptcy lawyer can assist you in deciding which bankruptcy option is the best option for your financial circumstances.
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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 editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to manage their finances through providing concise, well-studied and well-researched content that breaks down otherwise complex subjects into bite-sized pieces.
Auto loans editor
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