Luckily, most Chapter 7 bankruptcy filers are able to hold on to their modest vehicle. However, whether or not you can keep your car after filing Chapter 7 bankruptcy, and how long you can keep it for, depends on how well you’ve been handling the auto loan.
Keeping Your Car During Chapter 7
When you file for Chapter 7 bankruptcy, keeping your vehicle is probably one of the first things you worry about. Many people need their cars to go to work or run errands like getting groceries. Because vehicles are vital to many people’s lives, there are processes in place so that borrowers in bankruptcy have a chance to keep their cars.
Once you file for Chapter 7 bankruptcy, the process typically goes rather quickly. This type of filing is called the liquidation bankruptcy, and the entire process is usually done within six months. After you file, you need to state the value of all your property, including your vehicle. You can use websites like NADAguides or Kelley Blue Book to determine the market value of your car. You’re going to need to let the court and your trustee know rather quickly what your plans are concerning your auto loan, if you have one.
If you own your vehicle outright and aren’t making payments, then you can keep it if it’s below your state’s car exemption amount, and these amounts can vary greatly. However, if you still owe on your vehicle, you have two main options.
When you’re in Chapter 7 bankruptcy and you want to keep a car you're financing, you can choose one of these options:
- Reaffirmation agreement – If you’re current on your payments, you may be able to enter into a reaffirmation agreement. This means you continue paying on your vehicle under new or similar terms of your original loan. Some terms of your loan may be renegotiable in a reaffirmation, so it's in your best interest to try and get a better deal. Your car value must be covered by an exemption in order to be eligible for reaffirmation.
- Redemption – You may be eligible for a redemption no matter if you’re behind or current on your vehicle payments. To do this, you must pay for the entire value of the car in one lump sum payment.
If you’re unable to exempt your vehicle from bankruptcy, enter a reaffirmation agreement, or pay for the remaining balance of your loan, your car is likely to be liquidated within six months from when you filed.
Other Considerations and Your Vehicle
If you can’t reaffirm your loan or redeem your vehicle, you can choose to surrender it. After you surrender it, you're no longer responsible for the car after your bankruptcy is discharged.
Although surrendering your vehicle isn’t the best option, you can choose to voluntarily surrender it on your own terms. Depending on the language in your loan contract, your lender could repossess your car after only one missed payment. While bankruptcy puts an automatic stay on property so creditors and lenders can’t attempt to collect from you, your auto lender could still come to court and try to move to repossess the vehicle.
You can take time to clean out the car of your personal possessions, and return it when it’s most convenient for you if you’re unable to keep it.
Getting a Car After Bankruptcy
While you’re in the middle of Chapter 7 bankruptcy, getting into another auto loan isn’t likely to be possible. The process is so short that many lenders, including bad credit lenders, aren’t likely to approve you for a loan. Additionally, you need permission from the court to incur more debt while you’re in bankruptcy.
It’s typically a better idea to wait until your Chapter 7 bankruptcy is discharged to finance another vehicle. After you have your discharge papers in hand, you can work with a subprime lender for your next car. These lenders give you a higher chance of landing an auto loan approval, since they're well versed in helping people who have lower credit scores stemming from unique credit situations like bankruptcy.
Subprime lenders are signed up with special finance dealerships, and they often assist post-bankruptcy borrowers, unlike traditional lenders who are often hesitant to approve borrowers with lower credit scores.
Finding a Special Finance Dealership
After your bankruptcy is discharged, you’re usually in a better financial position than you were before. However, your credit score has likely taken some damage, and a Chapter 7 bankruptcy can remain on your credit reports for up to 10 years. This doesn’t mean you’re out of car loan options, though!
Here at The Car Connection, we have cultivated a nationwide network of dealers that are signed up with subprime lenders. Start the process of getting matched to a dealership in your area that has the bankruptcy auto loan options that you need by filling out our free car loan request form.