Bankruptcy

Your Car in Bankruptcy

By Chris Kramer

For many people considering filing for bankruptcy, it?s important to know whether they?ll be able to get on with their lives afterward?and for many, that will be determined by whether or not they have a car.

And, with car issues in the news pretty often these days, they?re certainly on our minds. Here?s a little crash course on what you can expect to happen to your car if you file for bankruptcy.

Chapter 7 & Chapter 13 Bankruptcy

Whether you file under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code, you can expect an automatic stay to take effect. This stay prevents debt collection, wage garnishment, lawsuits related to your finances, foreclosure and repossession.

The automatic stay remains effective until the court discharges your case.

Cars in Chapter 7 Bankruptcy

Chapter 7 bankruptcy offers filers a complete discharge of many unsecured debts. Your car loan, though, is a secured debt (it?s attached to property?your car). If you file a Chapter 7 case, you?ll have three options for your car loan:

• Redeem: This option involves one lump sum payment to your creditor for the car?s current fair market value. If you can afford to do this, it may make life easier in the future, since you?ll have eliminated car payments. But because most people file for bankruptcy at a time when cash is not handy, it may not be a viable option for many filers.
• Reaffirm: This option allows you to essentially continue making payments on your lease or loan as you did before you filed for bankruptcy. In reaffirming your debt, you agree a second time to continue making payments according to a schedule agreed upon by both you and your creditor.
• Surrender: If neither continuing payments nor redeeming the car will work for you financially (for example, if you owe more on the car than it?s currently worth), you can also choose to surrender your vehicle to your creditor and have the remainder of your debt discharged.

Cars in Chapter 13 Bankruptcy

If you file under Chapter 13 bankruptcy, your car?s future will depend on when you bought it.

• Newer cars: If you bought your car within 910 days of your bankruptcy filing, you?re required to pay the full value of the car loan, though your interest rate may be reduced.
• Older cars: If you purchased your car more than 910 days before filing for bankruptcy, you?re only required to repay the car?s current fair market value.

Additional Resources

Understanding Vehicle Financing (PDF)

Understanding Vehicle Repossession (PDF)

Full post as published by The Bankruptcy Blog on February 23, 2010 (boomark / email).