If you're on the verge of declaring bankruptcy, you may be wondering what happens to your car when you file. Depending on the state you live in and the type of bankruptcy you're filing, Chapter 7 or Chapter 13, you have several options available to you.
5 Options for Your Car in Bankruptcy
Bankruptcy is a tool for getting your debt under control. It's common for people to have the impression and misconception that you have to give up everything you own, or that a bankruptcy simply eliminates debt without consequences.
In truth, the goal of bankruptcy isn't to leave you destitute. So, for that reason, you can protect some of the assets you own with exemptions. There are other options you can use as well, but you can't continue with any debts, such as an auto loan, during bankruptcy without continuing to pay them.
Here are five options you have for your car when file for bankruptcy:
- Surrender the Vehicle – You can give your car back to the lender in order to reduce your debt if you're financing a vehicle. Any balance remaining at the end of your bankruptcy is discharged with your case.
- Exempt Your Car – If you own a vehicle outright you may be able to keep it if its value falls under your state's minimum exemption limit. Exemptions amounts vary widely by state, allowing between $1,000 and $20,000 to be exempt, depending on where you live. Some states only allow an exemption for one car, while others may allow it for multiple vehicles, so make sure you know your state's policy.
- Reaffirm the Auto Loan – If you're filing a Chapter 7 bankruptcy and your car loan payments are up to date, you have the option to continue paying on the loan. To do this, you must sign a reaffirmation agreement which gives you a new loan contract that you must continue to pay. Any remaining balance after your bankruptcy discharge doesn't get wiped out with the rest of your debt. Even after discharge, missing just one payment allows the lender to take action, whether it's repossession, the sale of your car to another party, or suing you for the deficiency balance of your loan.
- Redeem Your Vehicle – Rather than making payments, you can choose to keep your vehicle during a bankruptcy by paying off the current value of the car to the creditor. This can be a money-saver if you're upside down, but the creditor has to agree to this and the payment has to be made as a lump sum, which can be difficult for someone filing bankruptcy.
- "Cram Down" Your Loan – This is a tactic you can use in a Chapter 13 bankruptcy to pay your lender the value of the vehicle instead of the loan balance. If you've had your car for at least 910 days before filing Chapter 13, you can "cram down" the total you owe to match the value, and typically reduce your interest rate to something more manageable than before.
The tactic you choose to use depends upon your needs. Be sure to ask your lawyer any questions you may have before filing for bankruptcy.
Do You Need a Car in Bankruptcy?
If you've already filed bankruptcy and you find yourself in need of a vehicle, there are steps in place to help. Typically, if you're in a Chapter 7 bankruptcy, it's best to wait the four to six months until your bankruptcy is discharged before getting a car. However, because Chapter 13 bankruptcy is a longer process, lasting either three or five years, there are lenders that can help you get the vehicle you need before the bankruptcy is completed.
If this is the case, chances are you need to find a special finance dealer that has lenders equipped to handle loans for people in bankruptcy. Here at The Car Connection, we want to help you find a local dealership that can do just that. The process is fast, free, and simple to get started. Fill out our online auto loan request form now, and we'll get started finding you a dealer for you!