If you have bad credit and are on the verge of filing bankruptcy, you need to weigh the pros and cons very carefully. Bankruptcy impacts all parts of your life and, depending on the type you file, it could even impact whether or not you can keep your vehicle.
Is Bankruptcy the Right Option for Me?
Bankruptcy isn’t something to be entered into lightly. When you make the decision to file, you should know that a bankruptcy can help get you out of a financial bind, but it can also mean a big setback for your credit. If this is the point you’re at, you have to consider which type of bankruptcy is right for you.
Personal bankruptcy is most commonly filed as a Chapter 7 or Chapter 13. Both of these bankruptcies can clean up most of your outstanding debts, but they do so in very different ways.
Chapter 7 – A Chapter 7 bankruptcy is a short process, typically lasting only three to six months. During this time, any of your non-exempt property can be sold by your court-appointed bankruptcy trustee; the profits are used to repay your creditors with an agreed upon portion of what you owe. Once the bankruptcy is discharged, any remaining debt is wiped away. Afterward, you begin again with a clean slate, although the bankruptcy is now listed on your credit reports, which pushes your credit score lower than it was before you filed.
Chapter 13 – This bankruptcy is a much longer process, lasting either three or five years. During this bankruptcy, you continue to repay your creditors through a repayment plan created by your bankruptcy trustee. Again, you’re paying back a certain percentage of your debts, and any remaining amounts that aren’t covered through your repayment plan are wiped away in your discharge. This form of bankruptcy may allow you to retain more of your personal property than a Chapter 7, but the impact on your credit is similar.
Your Car Loan during Bankruptcy
If you have a car loan when you file bankruptcy, you may wonder if you’re able to keep your vehicle. Whether you can or not depends on a few things – namely, the type of bankruptcy you file and the value of the car you’re financing. An auto loan is treated differently in a Chapter 7 than it is in a Chapter 13.
According to the legal website Nolo.com, you can file a bankruptcy on a car loan, but you can’t keep a vehicle without making loan payments. So, if the sole intention of your bankruptcy is to get out of paying for a car while still keeping it through an automatic stay or exemption, you can’t.
However, you have three main options available to you if you intend to keep your vehicle during a bankruptcy:
- Chapter 7: Reaffirmation – One option that may be available when you’re in a Chapter 7 is reaffirmation. When you reaffirm the loan, you basically agree to continue paying on it as agreed, and the debt doesn’t get wiped away like those that are included in the bankruptcy.
- Chapter 7: Redeem your car – Your second option for keeping your vehicle in a Chapter 7 is to redeem your loan. Redemption means paying the remaining loan balance to the lender in one lump sum.
- Chapter 13: Keeping your car during a Chapter 13 bankruptcy is an easier task than in a Chapter 7, even if you're behind on payments. This is because a Chapter 13 bankruptcy is designed to allow you to catch up on your missed payments, and continue to pay off your loan over the three or five years of bankruptcy.
Of course, you can always choose to return your vehicle to the lender in either type of bankruptcy. This is called surrendering your car, and it differs from a voluntary repossession because you aren't responsible for any remaining balance after the lender sells your vehicle.
If this is your intention, you have to make sure and file the proper paperwork at the start of your bankruptcy to ensure the process is successful, and you don’t end up paying for a car you don’t have.
Getting a Bankruptcy Car Loan
When you need another vehicle, it can be difficult to get a loan during or after a bankruptcy due to your credit situation. But if you go to the right dealership, you can make the process a whole lot easier on yourself.
If you’re in this situation, you should visit a special finance dealer that has subprime lenders available. These lenders work with many types of bad credit situations, including bankruptcy and post-bankruptcy.
The Car Connection can help you find a special finance dealership. We're teamed up with a national network of these dealers, and we can connect you to one in your local area.
Get the process of finding your next auto loan started today! Simply fill out our fast, free, and easy car loan request form, and we’ll get to work matching you with a dealership near you.