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If you have a car loan and want to keep the car after filing bankruptcy, you’ll have to pay for it.By
Many people have the false impression that declaring bankruptcy entitles you to cancel an auto loan and keep your car free and clear of debt. It just isnt true. Bankruptcy will unwind your obligation to pay back the loan. However, you won’t be able to keep the car for very long if you don’t pay. Thus, the short answer is no—filing for bankruptcy won’t grant you a free car.
Nevertheless, having a car loan doesn’t guarantee that you won’t lose your car. In this article, youll learn:
- what happens to car loans in bankruptcy
- chapters 7 and 13 on how to maintain a financed vehicle, and
- “surrendering” a car you want to return to the lender.
More informative articles about what happens to cars in bankruptcy can be found here. Check out the links to more resources at the conclusion of this post. Do You Need More Background Information?.
Bankruptcy Erases Car Loans But Not Car Liens
The way bankruptcy operates is that it dissolves the agreement that obliges you to pay back the car loan provider. You have the option to declare bankruptcy, return the vehicle to the lender, and stop making any payments on the loan.
There is a catch, though, if you wish to keep your car while having a car loan. A bankruptcy filing does not remove the lien that gives the bank the right to repossess your vehicle if you fail to make your agreed-upon payments. Even though you erased the debt, the bank may use the lien to seize the car once the bankruptcy case is over, or earlier with the approval of the court. That means you have to pay for the car if you want to keep it.
Whether you file under Chapter 7 or Chapter 13 will determine how you pay back your auto loan and whether you can keep the car if you fall behind on it. Understanding Car Loans and Car Liens Before Bankruptcy.
Since buying an automobile is expensive, most people are unable to pay for one outright. Instead, by agreeing to pay back the debt with interest in monthly installments through the signing of a “promissory note,” borrowers finance the purchase.
Because most auto loans are for thousands of dollars, banks require the buyer to agree to pledge the vehicle as collateral in order to reduce risk. If the borrower “defaults” by neglecting to make payments, the extra requirement places a lien on the vehicle, enabling the lender to take possession of it.
Unlike a Visa or Mastercard balance, which would be considered a “unsecured debt,” the lien in a bankruptcy makes the auto loan a “secured debt.” “.
What’s the difference? You don’t have to return the items you bought, like the inflatables and tiki torches you charged for your yearly luau, if you don’t pay an unsecured debt.
But be careful—charging appliances, electronics, mattresses, jewelry, furniture, and electronics typically results in secured debt. Check the contract or receipt to find out.
How to Keep a Car in Bankruptcy Chapters 7 and 13
It will depend on the bankruptcy chapter you file under what circumstances you can keep a car with a car loan.
Keeping a Car After Filing Chapter 7 Bankruptcy on a Car Loan
Before you can keep your car after filing for Chapter 7 bankruptcy, you must win over the approval of the car lender and the Chapter 7 bankruptcy trustee assigned to your case. You will have to take different actions in order to appease them all.
If you can preserve all of the equity in your car through a bankruptcy exemption, the trustee in bankruptcy will not seize it. Therefore, the first thing you should do is determine if a motor vehicle exemption allows you to safeguard the equity in your car. Check for a wildcard exemption if the motor vehicle exemption is insufficient to cover your equity; many states allow filers of bankruptcy to use both.
In Chapter 7, bankruptcy, you can keep the car if you can preserve all of the equity (at least in the eyes of the trustee). Another issue is the vehicle lender and the lien connected to the loan.
When filing for Chapter 7 bankruptcy, you must be current on your car loan; you must continue to be current after your Chapter 7 case is over in order to avoid your car lender. If not, the lender will take possession of the car using its lien rights.
However, if you have a car loan, you have additional options to keep your vehicle during Chapter 7 bankruptcy, such as “redeeming” your vehicle or giving the lender its full value. Find out about all of your options for a car under Chapter 7 bankruptcy.
Keeping a Car After Filing Chapter 13 Bankruptcy on a Car Loan
Take into consideration filing for Chapter 13 bankruptcy if you are behind on your payments. Under a Chapter 13 repayment plan, you can keep the car and pay off the remaining balance over a period of three to five years.
However, in the event that you fail to make the required payments, including making up any missed payments on the auto loan, the lender may seize your vehicle under Chapter 13 bankruptcy. Learn more about your car in Chapter 13 bankruptcy.
Returning the Vehicle Bankruptcy to Get Out of a Car Loan
Returning a vehicle to the lender along with the car loan is sometimes the best course of action. Then youll be out from under the car loan entirely. Many people who file for bankruptcy will give back a car to the lender when they:
- paid too much for the vehicle
- cant afford the monthly payment, or
- don’t want the car or the loan attached to it
If youre in this situation, youll check the box that states that you plan to “surrender the property” when youre filling out the Statement of Intention for Individuals Filing Under Chapter 7 form. You can also surrender a car with a car loan in Chapter 13 bankruptcy.
Need More Bankruptcy Help?
It’s true that Nolo has been simplifying the legal system for more than 50 years, and we want to make sure you can find what you need. Below youll find more articles explaining how bankruptcy works. Remember that if you have any additional questions, the best place to start is our bankruptcy homepage!
While we strongly support education and research, not all bankruptcy-related topics or the specifics of your case can be covered by online articles. Hiring a local bankruptcy lawyer is the best way to protect your assets during a bankruptcy. Legal Information & Books from Nolo Bankruptcy.
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FAQ
Can bankruptcy clear a car loan?
Many people have the false impression that declaring bankruptcy entitles you to cancel an auto loan and keep your car free and clear of debt. It just isn’t true. Bankruptcy will unwind your obligation to pay back the loan.
Can a car loan be forgiven under Chapter 7?
Chapter 13 bankruptcy, also known as “wage earners” bankruptcy, restructures your debts to allow you to repay some or all of them over a predetermined amount of time. Your auto loan is not dischargeable when you file for Chapter 7 because it is a secured debt rather than an unsecured one.
Will I lose my car in Chapter 13?
Even after falling behind on payments, anyone filing for Chapter 13 bankruptcy is still able to keep their car. Because Chapter 13 repayment plans offer benefits not found in Chapter 7 repayment plans, you will be able to keep all of your property, including cars.
Read More :
https://www.nolo.com/legal-encyclopedia/can-you-file-bankruptcy-on-a-car-loan-and-keep-the-car.html
https://www.bankrate.com/personal-finance/debt/keeping-your-car-in-bankruptcy/