When facing financial difficulties, individuals often wonder what will happen to their car if they file for bankruptcy. The fear of losing their vehicle, which is often seen as a crucial lifeline, can be overwhelming. The good news is that the bankruptcy system has provisions in place to protect individuals’ cars, allowing them to retain ownership even during bankruptcy proceedings.
Bankruptcy law provides exemptions that enable individuals filing for Chapter 7 bankruptcy, the most common type for individuals, to keep most of their assets, including their car. Additionally, Chapter 13 bankruptcy allows individuals to continue making their car loan payments under a structured repayment plan.
However, the process of keeping a car during bankruptcy can be complex and requires taking various factors into account. Understanding the type of bankruptcy being filed, whether the car is owned, leased, or financed, and the value of the car are all important considerations in navigating the impact of bankruptcy on car ownership effectively.
In this article, we will explore the steps you need to take to keep your car when filing for bankruptcy, the impact of bankruptcy on car loans and repayment options, and how to successfully navigate the complex process of car ownership during bankruptcy.
Keeping Your Car When Filing Bankruptcy
The ability to keep your car when filing for bankruptcy depends on several factors. Filing for Chapter 7 bankruptcy, which involves liquidating certain assets to repay debts, requires evaluating the equity in your car and utilizing bankruptcy exemptions.
When listing assets in a Chapter 7 bankruptcy filing, your car is considered an asset, and its equity, which is calculated by subtracting the current loan balance from the car’s value, becomes crucial. Each state has its own exemptions for car equity, and if the equity in your car is less than the exemption amount, you can keep the car.
However, if the equity exceeds the exemption, the bankruptcy trustee may sell the car and allocate the exempted amount towards debt repayment. To increase the exemption amount and potentially retain a car with higher equity, individuals can also use wildcard exemptions.
It is advisable to consult a bankruptcy attorney to navigate the complex process of exemptions and retaining ownership of your car during bankruptcy.
Impact of Bankruptcy on Car Loans and Repayment
The impact of bankruptcy on car loans and the options available for repayment depend on the type of bankruptcy filed and the financial situation of the individual.
In Chapter 7 bankruptcy, individuals have several choices when it comes to their car loans. One option is car loan reaffirmation, which allows individuals to continue making payments on their vehicle loan while discharging other debts. By reaffirming the debt, borrowers provide assurance to the lender that they will fulfill their payment obligations. However, it’s important to note that if the borrower fails to make payments after reaffirmation, they cannot refile for Chapter 7 bankruptcy again for eight years.
Another option in Chapter 7 bankruptcy is loan redemption. With loan redemption, individuals can pay the remaining current replacement value of the car to the lender and own the car outright. While this option allows individuals to keep their vehicle, it is less common due to the financial burden it presents.
Alternatively, individuals can choose to surrender their car, which involves returning it to the lender. Surrendering a car eliminates the responsibility for the remaining loan balance, but also means losing the vehicle.
In Chapter 13 bankruptcy, individuals have the opportunity to catch up on late car payments through a structured repayment plan. They can also reduce the principal balance of the car loan to the fair market value through a process called cramdown. Consulting with a bankruptcy attorney is essential to fully understand the impact of bankruptcy on car loans and determine the best course of action for your specific circumstances.