Can I File Bankruptcy and Keep My Car Loan?

Filing for bankruptcy can provide financial relief, and many debtors are concerned about retaining their vehicle. It is often possible to keep your car, though the specific outcome depends on the bankruptcy chapter filed, the vehicle’s value compared to the outstanding loan balance, and your ability to continue making payments.

Understanding Your Options

When considering bankruptcy, individuals primarily explore two main chapters: Chapter 7 and Chapter 13. Chapter 7 bankruptcy involves discharging most unsecured debts. For those filing Chapter 7, the primary methods to keep a vehicle are reaffirmation or redemption.

Reaffirmation involves entering into a new agreement with the lender to continue making payments on the car loan despite the bankruptcy discharge. Redemption allows a debtor to pay the lender the current fair market value of the vehicle in a lump sum. Both options require careful consideration of one’s financial ability and the vehicle’s actual value.

Chapter 13 bankruptcy allows debtors to propose a repayment plan to the court that typically spans three to five years. Under a Chapter 13 plan, a car loan can be incorporated into the overall payment structure. This can include catching up on missed payments or, in some cases, reducing the principal balance owed on the vehicle. The ability to keep a car in either chapter hinges on maintaining current payments or demonstrating the financial capacity to meet future obligations within the bankruptcy framework.

Reaffirming Your Loan

Reaffirming a car loan means a debtor agrees to remain personally liable for the debt even after other debts are discharged. This agreement creates a new contract between the debtor and the original lender. The purpose is to ensure the debtor can keep the vehicle by continuing to make regular payments as per the loan terms.

To reaffirm a debt, debtors typically use the Reaffirmation Agreement form, which must be filed with the bankruptcy court. This form requires loan details, including the current balance, interest rate, and payment schedule. Debtors must also provide information about their income and expenses to demonstrate their ability to make the reaffirmed payments without undue hardship.

The reaffirmation process ensures the agreement is in the debtor’s best interest. If represented by an attorney, the attorney must declare the agreement does not impose undue hardship. If unrepresented, the court typically holds a hearing to determine if the agreement is genuinely in the debtor’s financial interest. The court may decline approval if payments create an undue financial burden.

Once filed, the reaffirmation agreement becomes a contract. If the debtor defaults on the reaffirmed loan, the lender can pursue collection actions, including repossession and seeking a deficiency judgment. Reaffirming a debt means foregoing the bankruptcy discharge for that specific obligation. Debtors must carefully assess their long-term financial stability and the necessity of keeping the vehicle before committing to a reaffirmation agreement.

Redeeming Your Car

Redeeming a car in Chapter 7 bankruptcy provides another avenue for debtors to retain their vehicle. This process involves paying the lender a lump sum equal to the current fair market value of the vehicle. This option is particularly advantageous when the loan balance significantly exceeds the car’s actual worth.

Determining the car’s fair market value is the first step in the redemption process. Debtors often rely on reputable valuation guides, such as NADA Guides or Kelley Blue Book, to establish a market price for their vehicle. The court will typically review these valuations to ensure they are reasonable and reflect the car’s condition and features.

Financing the lump sum payment for redemption can be a challenge. Specialized lenders often provide “redemption loans,” offering financing to debtors based on the vehicle’s appraised value. Alternatively, some individuals may secure funds from family or friends to facilitate the redemption.

Once the value is established and financing is secured, the debtor files a “Motion to Redeem” with the bankruptcy court. This motion must include supporting documentation, such as the valuation report and details of the financing arrangement. If the court approves the motion, the debtor pays the lump sum to the lender, and the lien on the vehicle is removed.

Using a Chapter 13 Plan to Keep Your Car

For individuals filing Chapter 13 bankruptcy, retaining a car involves integrating the car loan into the comprehensive repayment plan. This structured approach allows debtors to address their vehicle debt over three to five years, often providing more flexibility than Chapter 7 options. The Chapter 13 plan outlines how various debts, including the car loan, will be paid through regular disbursements made by a bankruptcy trustee.

A benefit of a Chapter 13 plan is the ability to cure any arrears on the car loan. If payments have fallen behind before filing, the plan can include provisions to catch up on these missed payments over the life of the plan, preventing repossession. This allows debtors to bring their loan current without immediately paying a large sum.

A feature for certain car loans in Chapter 13 is the “cramdown” provision. If the car loan was incurred more than 910 days (approximately 2.5 years) before the bankruptcy filing, the debtor may be able to reduce the principal balance of the loan to the current fair market value of the vehicle. This means payments will be based on the car’s actual worth, rather than the original loan amount. The interest rate on the car loan may also be adjusted to a reasonable market rate as part of the plan.

The proposed Chapter 13 plan must be confirmed by the court, which assesses its feasibility and whether it meets legal requirements, such as the “best interests of creditors” test. Once confirmed, the debtor makes regular payments to the Chapter 13 trustee, who then distributes the funds to creditors, including the car lender. This systematic payment structure provides a pathway for debtors to keep their vehicle while reorganizing their overall financial obligations under court supervision.

What Happens if You Don’t Keep the Car

If keeping your car is not feasible or desirable during bankruptcy, surrendering the vehicle to the lender is an alternative. This option allows debtors to walk away from the car loan debt entirely, as it will be discharged as part of the bankruptcy proceedings. Surrendering the vehicle means you will no longer be responsible for any outstanding balance on the loan.

The implication of surrendering a vehicle is that the debtor is relieved of personal liability for the debt. This includes any “deficiency balance,” which is the difference between what is owed on the loan and the amount the lender recovers from selling the repossessed or surrendered vehicle. By surrendering the car, debtors avoid potential lawsuits or collection efforts for this deficiency.

The process of surrendering a car typically involves coordinating with the lender to arrange for the vehicle’s pickup or drop-off. Debtors simply return the keys and the vehicle, and the lender handles the sale. This option is often considered when the car has negative equity, meaning it is worth significantly less than the loan balance, or if the payments are simply unaffordable given the debtor’s financial circumstances.