What Happens to My Car in Bankruptcy?
Solutions for a Financial Crisis
In most bankruptcy cases, you can protect your car using allowable bankruptcy code exemptions.
While Chapter 7 bankruptcy is mainly designed to address debt related to credit cards and medical bills, Chapter 7 exemptions outline specific protections for things like cars, home furnishings and family keepsakes.
Exemptions allow you to file for Chapter 7 bankruptcy relief while protecting important property, like your car.
Car Loans in Bankruptcy
It is important to clarify whether you have a clear title to your car.
If you have pledged your car as security for a debt, or if you are currently leasing or financing a vehicle, you will probably have a few choices for secured loans after your Chapter 7 bankruptcy filing:
A reaffirmation agreement constitutes a contract between you and your car creditor. You will agree to pay the balance owed on your car note, despite your bankruptcy filing.
Under this plan, you will continue to make your payments and the creditor agrees not to repossess your car.
Reaffirmed debts will not be discharged in bankruptcy.
If you do not make your payments, the car lender is able to repossess the car and sue you for the deficiency balance.
Reaffirmation agreements are voluntary, but as you can see, it is a decision with serious repercussions.
In Chapter 7 bankruptcy, you are entitled to purchase or redeem your car from your creditor by making a one-time payment equal to the car’s fair market value.
The U.S. Bankruptcy Code provides that you are required to pay your creditor the replacement retail cost of the car, and the balance of the debt will be discharged.
For example, consider a car worth $5000, in a situation where the owner owes the finance company $10,000. In this case, you can redeem the vehicle by paying the creditor $5,000.
The remaining amount will be discharged by your bankruptcy.
If you cannot possibly afford the monthly payments on your car loan or if you determine that you owe more than the car is worth, you are able to get rid of the car and related dept as part of your Chapter 7 bankruptcy discharge. You will be required to surrender such a vehicle to the creditor.
If you are leasing a car, in Chapter 7 bankruptcy, you can opt to either continue making monthly payments or surrender the car back. If you surrender the vehicle, any obligation under the lease will be eliminated by the bankruptcy.
Talk to a Chapter 7 Attorney about Keeping Your Car through Bankruptcy
Because many states have different bankruptcy code exemptions, they allow the debtor to choose whether to take the federal slate of exemptions or the state ones.
As these laws vary from state to state, understanding what your choices are can be difficult. A bankruptcy lawyer can explain what applies to your specific case.