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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 goal is to help you make smarter financial decisions by offering you interactive tools and financial calculators, publishing original and objective content. This allows you to conduct research and compare information for free and help you make sound financial decisions. Bankrate has agreements with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site come from companies that pay us. This compensation may impact how and where products are displayed on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home loan products. However, this compensation will not influence the content we publish or the reviews that appear on this website. We do not cover the universe of companies or financial deals that may be available to you.

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5 min read Published 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.

Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances with clear, well-researched information that break down complex topics into manageable bites.

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If you’re considering , there are options which can prevent your car from being repossessed even if you haven’t fully repaid the auto loan. In some states, you might be able to stay away from repossession of your vehicle by using bankruptcy code exemptions, though the laws vary from state to state. Are you able to protect your vehicle by filing bankruptcy?

Both Chapter 7 and Chapter 13 bankruptcy include provisions through which you might be able keep the car you bought with secured loan.

How do you keep your car by filing Chapter 7 bankruptcy Car loans are secured by the vehicle, which means that it is pledged as collateral in order to pay back the loan. Since the car is used as collateral, it is able to be repossessed by the lender if you fail to keep up with the payments. However, under Chapter 7, the most well-known bankruptcy for people there are a variety of options to hold on to your car. “To keep a vehicle while being in Chapter 7, the debtor has to be current and in good standing with their lender, perform a ‘redemption,’ which involves paying back the lender or performing an ‘affirmation’ that could mean changing the loan terms, but this requires lender approval,” says Lamar Hawkins, a bankruptcy attorney with Guidant Law. This is how reaffirmation and redemption work: Redemption: Pursuing redemption involves to your creditor the vehicle’s actual worth. If you’re able to do this it can make your life simpler in the future because you’ll have eliminated car payments. But because most bankruptcy filings are made at a time when cash is scarce and available, this might not be an option for you. Reaffirm: This option allows you to make payments on your loan until you file for bankruptcy. When you reaffirm your debt, you sign a new agreement to continue to pay according to a schedule that the creditor and you that could include amended loan terms. Bankrate tip

If neither of these options is a good fit for your financial situation, you can give your car to the creditor and get the debt discharged.

“When you get the Chapter 7 Discharge, you are no longer liable for personal obligation to pay the loan,” says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. “All the creditor is able to do is take their collateral — your car. They are not able to sue you for money.” The bankruptcy exemptions when filing in Chapter 7, your assets are sold off or liquidated to pay your creditors. But a bankruptcy court allows the holder to retain a certain amount of your property up to a certain monetary value, according to Debt.org. This is referred to as an “exemption.” The maximum federal exemption is $4,000. But many states have their own exemption limits that must be followed Certain states’ exemptions are more than $4,000, while others are lower. The value of your vehicle in bankruptcy filings is not determined by the amount you paid for it. In many states, the value is based on the car’s actual cash value depending on factors such as the car’s year, make and mileage. Automotive industry sources such as Kelley Blue Book or Edmunds could also be used to help determine the worth of your car. If the value of your vehicle is determined to be less than your state’s exemption limits, then you’ll be able to keep the car even though you’re filing for bankruptcy. In contrast in the event that the car is more valuable than the exemption, the bankruptcy trustee could decide to offer the car for sale in order to repay your debts. This is how it works If the exemption for your state is $4,000, and your vehicle’s worth is $2,000, then you will likely be allowed to keep the car because it’s less valuable than the exemption. If, on the other hand the exemption for your state is $4,000 and your car is worth $10,000, then the bankruptcy trustee could sell the vehicle and make use of the proceeds to pay off debt. The reasons you shouldn’t keep your vehicle during Chapter 7 bankruptcy Keeping your car may not always be possible when filing Chapter 7 bankruptcy. In some cases, it doesn’t make sense financially to hold on to the car. In deciding these issues, the value of your car and your equity in your car will play an important role. Equity in the car and bankruptcy similar to a mortgage for a home equity is calculated by subtracting the amount you owe on the car loan from the car’s actual market price. “For instance, if you own a vehicle with a fair market value of $10,000 and a $1,000 loan balance, you’ll have equity of $9,000,” says Rosenblum. When the equity value is greater than the exemption, a bankruptcy trustee could opt to dispose of the car and apply the proceeds toward paying off debts. It doesn’t make financial sense to keep the car. Lastly you should keep to your mind the vehicle’s value at the moment is on the car loan, then keeping the vehicle will not necessarily be a good financial choice. “Very often, the loan balance is more than the value of the car, and without the means or motivation to keep the vehicle, the bankruptcy filer will let go of the vehicle,” says Michael Sullivan who is a personal financial advisor of the non-profit financial counseling firm Take Charge America. How do you keep your car through Chapter 13 bankruptcy Chapter 13 bankruptcy offers a variety of options to keep your car. “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 component the Chapter 13 debt reorganization, an initial three to five-year repayment plan will be developed that factors in your earnings and assets. The aim in Chapter 13 is to Chapter 13 process is to enable you to keep your possessions, such as your car, while paying back your credit card. Additionally, if you’re behind on your payments, the process will require you to catch up and pay on time moving forward. The conditions of your loan The court may also demand that the lender modify the car loan conditions, which could include lowering the interest rate, which can aid in keeping the car. The terms will be revised, and the monthly payments will be lower. “A Rewrite of the debt owed to the lender is possible by way of a Chapter 13 plan, and market terms can be forced upon the lender,” says Hawkins. Reducing the loan amount altering your auto loan terms as part of Chapter 13 may also include what’s called a “cramdown,” which reduces the amount you have to pay the lender to the car’s fair market value. The timeframe of your purchase of a car is an important factor in the cramdown process. In particular, there is a 910 rule that applies to cramdowns. Cars that are newer: If you bought your vehicle within 910 days of bankruptcy application, you have to be able to pay the entire amount of the car loan, though the rate of interest may be decreased. Older cars: If you purchased your vehicle more than 910 days before filing bankruptcy, you’re only required to pay the current fair market value. The reasons you shouldn’t keep your car in Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your vehicle when you are pursuing Chapter 13, or hanging on to your car might not be the best option. Some instances where this might be the case include: Your loan has been in arrears and you don’t have the financial resources for bringing the loan current or the ability to pay the monthly installments. In this case it is possible to surrender the vehicle. The car isn’t in good shape or is unreliable. In these situations, giving up the car may be a better option. The car is highly valuable, and selling it could provide money to pay off your debts. You have significant equity in the vehicle, which surpasses the bankruptcy exemption thresholds in your state. The most important thing to remember is Filing bankruptcy doesn’t automatically mean that a car bought with secured loan is repossessed. Under both Chapter 7 and Chapter 13 bankruptcy codes, provisions protect your vehicle. Consulting a bankruptcy attorney will help you determine the bankruptcy strategy that makes the most sense for your financial circumstances.

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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.

The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances with precise, well-studied information that break down complicated topics into digestible chunks.

Auto loans editor

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