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How to file for bankruptcy and keep your car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make smarter financial decisions by offering interactive tools and financial calculators as well as publishing informative and trustworthy content, by enabling you to conduct your own research and compare information at no cost and help you make sound financial decisions. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this website are provided by companies that pay us. This compensation could affect how and where products are displayed on the site, such as, for example, the order in which they may appear within the listing categories, except where prohibited by law. Our mortgage, home equity and other products for home loans. However, this compensation will affect the information we provide, or the reviews that you see on this site. We do not cover the universe of companies or financial offerings that could be accessible to you.
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5 minutes read. published on March 20, 2023.
Authored by Mia Taylor Written by Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain confidence to control their finances through providing clear, well-researched information that break down complex topics into manageable bites.
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If you’re thinking of doing so , there are options to help keep your car from being repossessed even if you haven’t paid off the auto loan. In several states, you could be able to avoid repossession of your vehicle through bankruptcy code exemptions, but the rules vary between states. Do you have the ability to safeguard your car by filing bankruptcy?
Each Chapter 7 and Chapter 13 bankruptcy have provisions that you could be able to keep a vehicle that you purchased with a secured loan.
How to preserve your vehicle by filing Chapter 7 bankruptcy Car loans are secured, which means the car is pledged as collateral in order to pay back the loan. Because the car serves as collateral, it could be taken by the lender if you fail to make payments on the debt. However in Chapter 7, the most popular bankruptcy for individuals has a number of options to hold on to your vehicle. “To keep a vehicle while you go through Chapter 7, the debtor must be current and stay up to date with his lender or perform a’redemption or redemption,’ which is making payments to the lender or executing an ‘affirmation’ that may require changing the loan terms, but this will require lender permission,” says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. The following is how reaffirmation and the redemption process works: Redemption: The process of pursuing redemption is a way to pay your creditors for the car’s actual reasonable market value. If you’re able to do this, it may make life easier in the future because you’ll be able to eliminate car payments. However, since most people file bankruptcy at a time when cash is not readily available and available, this might not be an option that is feasible. Reaffirmation: This option permits you to continue making payments on your loan until you file for bankruptcy. By reaffirming your debt you agree a second time to continue to pay in accordance with a plan set by you and your creditor, which may include revised loan terms. Bankrate’s tip
If neither option works financially for you You can also sell your car to the lender and get the debt discharged.
“When you are granted the Chapter 7 Discharge, you are no longer liable for personal obligation to pay your loan,” says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. “All the creditor is able to do is seize their collateral- your car. They cannot sue you for money.” The bankruptcy exemptions when you file to file for Chapter 7, your assets are liquidated or sold to pay creditors. The bankruptcy court will allow that you keep certain amount of your assets in excess of a specified dollar value, according to Debt.org. This is referred to as”exemption. “exemption.” The maximum federal exemption is $4,000. However, some states set their own limit that must be followed Certain states’ exemptions are higher than $4,000, while others are less. Your value for your car in bankruptcy filings is not determined by the amount you paid for it. In the majority of states, value is based on the car’s actual cash value based on such factors as the car’s year, make and mileage. Car industry sources like Kelley Blue Book or Edmunds may also be used to help determine the value of your vehicle. If your car’s current value is found to be lower than your state’s exemption limits, then you’ll be permitted to keep your car while you’re filing bankruptcy. On the other hand in the event that the car is worth more than the exemption, a bankruptcy trustee may opt to sell the vehicle in order to you pay off your creditors. Here’s how it works: If your state’s exemption is $4,000 and your car’s worth is $2,000, then you’ll likely be able to keep the car because it’s value is less than the exemption. If you’re on the other side, your state’s exemption level is $4,000 and your vehicle is worth $10,000, then the bankruptcy trustee can sell the vehicle and make use of the proceeds to pay off your debt. Reasons you wouldn’t keep your car in Chapter 7 bankruptcy Keeping your car may not always be feasible in the event of making a Chapter 7 bankruptcy. Sometimes, it does not make financial sense to try and hang on to the vehicle. In deciding these issues, the value of your car as well as your equity in the car play a key role. Equity in the car and bankruptcy similar to a mortgage for an investment property equity is determined by subtracting the amount you owe on your car loan from the vehicle’s actual market price. “For instance, if you have a car with an appraised value of $10,000 and an outstanding $1000 loan balance, you’ll have $9,000 of equity,” says Rosenblum. In the event that your equity amount is greater than the exemption that a bankruptcy trustee may decide to sell the vehicle and apply the proceeds toward the repayment of your debts. It’s not financially sensible for you to hold on to the car. Finally you should keep in mind that if your vehicle’s value at the moment is included in the loan, then keeping the vehicle will not necessarily be a smart financial decision. “Very often, the loan amount is higher that the worth of the car and, if there is no way or the desire to keep the car, the bankruptcy filer will let it go,” says Michael Sullivan, a personal financial consultant of the non-profit financial counseling agency Take Charge America. How do you keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy also gives you several options to keep your vehicle. “The Chapter 7 framework is the basis of Chapter 13,” says Rosenblum. “But when you enter Chapter 13, you reorganize your debt.” The process of creating the payment plan is a an element of Chapter 13 debt reorganization, a three- to five-year repayment plan will be created which takes into account your earnings and assets. The purpose in this Chapter 13 process is to let you keep your possessions, such as your vehicle, while paying the debt. If you’re in a position to fall behind in your payments, the program will require you to make up the gap and pay your debt on time going forward. Revising the terms for the loan The court could also require that the lender revise the car loan terms, including lowering the interest rate, which can aid in keeping the vehicle. The terms will be revised, and the monthly payments will be less. “A restructuring of the debt owed to the lender is possible via the process of a Chapter 13 plan, and market terms can be forced on the lender,” says Hawkins. Reducing the loan balance changing auto loan conditions as part of Chapter 13 may also include what’s called a “cramdown,” which reduces the amount you must pay the lender according to the vehicle’s fair market value. The timeline of your purchase of a car is a significant factor when it comes to the cramdown process. Particularly, there is a 910 rule that applies to cramdowns. Newer vehicles If you purchased your vehicle within 910 days of your bankruptcy, then you have to be able to pay the entire amount of the car loan, though your interest rate may be reduced. Older vehicles: If you bought your car after 910 days before filing for bankruptcy, you’re only required to pay back the vehicle’s actual market value. Reasons you wouldn’t keep your car during Chapter 13 bankruptcy In certain circumstances, it may not be possible to keep your car while trying to file for Chapter 13, or hanging on to the car may not make sense. The scenarios where this could apply include: The loan is in arrears and you don’t have the funds to bring the loan up to date or to continue making monthly payments. In this scenario you might have to give up the vehicle. The car is not in good shape or is unstable. Under these circumstances, simply surrendering the vehicle could make more sense. The car is particularly valuable and selling it would provide money to pay off your outstanding debts. You own a substantial equity in the vehicle, which surpasses the bankruptcy exemption thresholds in your state. The final result Filing bankruptcy does not automatically mean that a car bought with a secured loan will be repossessed. In both Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. Working with a bankruptcy attorney can help you decide which approach to bankruptcy is most appropriate for your personal financial situation.
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Written by a Contributing Writer
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to control their finances through providing concise, well-studied and well-researched content that break down complex topics into digestible chunks.
Auto loans editor
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