The best way to keep your property and still declare bankruptcy is with a Chapter 13. This type allows you time to repay at least part of your debts – and you get to keep your vehicle in most cases. But, what if something happens to your car while you're still in a Chapter 13 bankruptcy and you need another?
Your Car in Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is known as a repayment bankruptcy, lasting either three or five years. In this type of bankruptcy, your court-appointed trustee works out a repayment plan that you must follow.
When it comes to vehicles in Chapter 13 bankruptcy, there's a lot to consider, and your choice of options comes down to a few factors:
- Do you own your car? – If you own your vehicle outright and can exempt all the equity, you're free to keep it. However, if your car is worth more than you're able to cover with the bankruptcy exemptions in your state, you're required to pay any non-exempt equity in order to keep it. For example, if the value of your vehicle is $6,000 but your state only allows a $4,000 exemption, you have to contribute $2,000 to your bankruptcy repayment plan in order to pay off other creditors.
- Are you financing a car? – If you're financing a vehicle, you have to prove that you're able to keep up with the loan payment during your bankruptcy. If you're behind, you're still able to keep your car in most cases, as long as you continue to make regular payments and make up any you missed. In this case, back payments are included in your repayment plan and spread out over your Chapter 13.
- Is there equity in your vehicle? – If you have an auto loan but have negative equity (meaning you owe more on the loan than the car is worth), you may not want to keep it. In this case, you can surrender your vehicle and walk away. If you don't want to walk away, you may be able to lower the loan balance if you qualify for a cramdown. This practice allows you to reduce the loan balance equal to the current value of the car, and is only offered in a Chapter 13.
If you decide to walk away from your vehicle, or something happens to it while you're in Chapter 13, there are rules in place that allow you to take out an auto loan.
Getting a Car during Chapter 13 Bankruptcy
Financing a car during a Chapter 13 bankruptcy is possible, but it takes some planning and the right lender to get it done. Typically, you're going to need a subprime lender through a special finance dealership due to the bad credit that results from filing bankruptcy.
Once you find a dealer, you can sit down with them to fill out a sample financing statement. This document must list every detail about the loan and the vehicle you're financing, including the total cost, loan term, maximum interest rate you could be charged, monthly payment, and make and model.
It's very important that the dealership lists the words "or similar" next to the car you select. Auto loan approval during a Chapter 13 must go through the court first, and this may take a while.
It's possible for the exact vehicle you chose to be sold before you can head back to the dealer to complete the loan process. Without the "or similar" designation, you could be required to start over if the car has sold.
Ready to Find a Bankruptcy Auto Dealer?
Because Chapter 13 bankruptcy is a repayment bankruptcy, it's easier to keep your vehicle during this process than in a Chapter 7. However, if you can't keep your car, or something happens to it during Chapter 13, you have the option to finance another one.
If you're not sure where to start the process, we can help. Here at The Car Connection, we work with a nationwide network of special finance dealerships that have lenders available to help people with bad credit, no credit, and even bankruptcy.
To get started toward your next vehicle, simply fill out our auto loan request form today. Then, we'll get right to work connecting you with a dealer in your area. Don't let bankruptcy stand between you and the car you need. Get started now!