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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 mission is to help you make smarter financial decisions by offering you interactive tools and financial calculators, publishing original and objective content. This allows users to conduct research and compare information at no cost – so that you can make sound financial decisions. Bankrate has partnerships with issuers, including but not restricted 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 can affect the way and where products are displayed on this site, including the order in which they appear within the listing categories, except where prohibited by law for our mortgage home equity, mortgage and other home lending products. This compensation, however, does not influence the content we publish or the reviews you read on this site. We do not cover the entire universe of businesses or financial deals that may be open to you.
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5 min read Read on March 20, 2023.
Written 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 from late 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing precise, well-studied information that breaks down complicated subjects into bite-sized pieces.
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If you’re thinking of doing so the possibility of bankruptcy, there are options that can help you keep your vehicle from being repossessed — even if you haven’t fully repaid the auto loan. In several states, you could be able avoid repossession of your car through bankruptcy code exemptions. However, the laws vary between states. Are you able to protect your vehicle by filing bankruptcy?
Each Chapter 7 and Chapter 13 bankruptcy include provisions through which you could be able to keep a car that you bought with a secured loan.
How to preserve your vehicle by filing Chapter 7 bankruptcy Car loans are secured, which means the car is used as collateral to back the loan. Because the car serves in the capacity of collateral it could be repossessed by the lender if you fail to maintain payments on the debt. However under Chapter 7, the most well-known bankruptcy for people there are a variety of options for hanging on to your car. «To maintain a car when being in Chapter 7, the debtor has to be current and up to date with his lender, perform a ‘redemption,’ which involves paying off the lender or executing an ‘affirmation’ that can involve altering the loan conditions, however this will require lender approval,» says Lamar Hawkins, a bankruptcy attorney with Guidant Law. This is how reaffirmation and redemption works: Redemption: The process of pursuing redemption involves to your creditor for the car’s actual worth. If you can afford to do this it can make your things easier later on because you’ll be able to eliminate car payments. However, since most bankruptcy filings are made at a time when cash isn’t readily available and available, this might not be a viable option. Reaffirmation: This option permits you to make payments on your loan prior to filing for bankruptcy. In reaffirming your debt, you agree a second time to make payments according to a timetable set by the creditor and you that could include amended loan conditions. Bankrate tip
If neither option is working financially for you, you can give your car to the creditor and have the debt wiped off.
«When you receive the Chapter 7 Discharge, you are no longer liable for personal responsibility to pay your loan,» says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. «All the creditor is able to do is take their collateral -that is, your vehicle. They cannot take you to court for cash.» The bankruptcy exemptions when you file for Chapter 7, your assets are sold off or liquidated to pay your creditors. But a bankruptcy court allows that you keep specified amount of your property up to a certain dollar value, according to Debt.org. This is called»exemption. «exemption.» It is a federal exemption limit. maximum federal exemption is $4,000. However, some states set their own limits that must be followed Some states’ exemptions are higher than $4,000, while others are less. What you can expect to receive for your vehicle when you file bankruptcy is not based on what you paid for it. In many states, the value is determined by the actual value of the vehicle determined by factors like the year of the vehicle, its make and mileage. Car industry sources like Kelley Blue Book or Edmunds may be utilized to determine the value of your car. If the current value of your car is found to be lower than your state’s exemption limit, you’ll be permitted to keep your car when you file for bankruptcy. On the other hand when the vehicle is worth more than the exemption limit, the bankruptcy trustee could decide to sell the vehicle in order to repay your debts. The way it works is If the state’s exemption is $4,000 and your car’s value is $2,000, you’re likely to be permitted to keep the vehicle because it’s worth less than what’s allowed. If you’re on the other side the exemption for your state is $4,000 and your car is worth $10,000, the bankruptcy trustee could sell the car and utilize the proceeds to pay off your debt. The reasons you shouldn’t keep your vehicle during Chapter 7 bankruptcy Keeping your vehicle may not be possible when making a Chapter 7 bankruptcy. Sometimes, it isn’t financially feasible to hang on to the vehicle. When sorting through these questions the worth of your car and your equity in the vehicle will play an important role. The equity in your car and bankruptcy are similar to a mortgage for an investment property equity is calculated by subtracting the amount you owe on the car loan from the actual market price. «For instance, if you have a car with a fair market value of $10,000, and the $1,000 loan balance, you have equity of $9,000,» says Rosenblum. If the equity is more than the exemption, a bankruptcy trustee could opt to dispose of the car and put the proceeds towards paying off your debts. It doesn’t make financial sense for you to hold on to the car. Finally, it’s also worth bearing in mind that if your vehicle’s current fair market value is included in the loan, then keeping the car won’t necessarily be a smart financial decision. «Very often, the loan balance is greater that the worth of the car and, without the funds or motivation to keep the car, the filer lets it go,» says Michael Sullivan, a personal financial consultant of the non-profit financial counseling agency Take Charge America. How do you keep your vehicle through Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options for keeping your vehicle. «The Chapter 7 framework is the basis for Chapter 13,» says Rosenblum. «But when you enter Chapter 13, you reorganize your debt.» Creating a payment plan As part the Chapter 13 debt reorganization, an initial three to five-year repayment plan will be developed which takes into account your earnings and assets. The aim for the Chapter 13 process is to enable you to keep your possessions, including your vehicle, while paying back your credit card. If you’re in a position to fall behind on payments, the plan will need you to make up the gap and pay on time moving forward. Revising the terms for your loan The court may also demand that the lender modify the car loan conditions, which could include lower interest rates, which can aid in keeping the vehicle. If the terms are changed, the monthly installments will be less. «A Rewrite of the debt owed to the lender could be done through the Chapter 13 plan, and market terms can be forced on a lender,» says Hawkins. The reduction of the loan amount changing auto loan terms as part in Chapter 13 may also include the process known as a «cramdown,» which reduces the amount you have to pay to the lender according to the vehicle’s actual market value. The timing of your purchase of a car is a crucial aspect in the cramdown process. In particular, there is the 910 rule which applies to Cramdowns. Newer vehicles: If you bought your vehicle within 910 days of your bankruptcy filing, you have to pay the full value of the loan however, the rate of interest may be decreased. Older vehicles: If you purchased your car more than 910 days before filing for bankruptcy then you’re only required pay the current reasonable market price. There are a variety of reasons why you should not keep your car in Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your car when trying to file for Chapter 13, or hanging on to it may not be a good idea. Examples of when this may hold true include: The loan has been in arrears, and you don’t have the funds for bringing the loan current or to continue making monthly payments. In this scenario you might have to surrender the vehicle. The car isn’t in good shape or is unstable. In these conditions, giving up the car may be a better option. The car is highly valuable, and selling it could yield money in order to repay your outstanding debts. There is a significant equity stake in the vehicle, which is greater than the bankruptcy exemption levels in the state you reside in. The final result Filing bankruptcy does not automatically mean a car purchased with a secured loan is repossessed. In each of the Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. Consulting a bankruptcy attorney can assist you in deciding the bankruptcy strategy that is most appropriate for your financial situation.
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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.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to take control of their finances with clear, well-researched information that break down complex subjects into bite-sized pieces.
Auto loans editor
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