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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 financial calculators and tools as well as publishing informative and trustworthy content, by enabling you to conduct research and compare information for free - so that you can make informed financial decisions. Bankrate has partnerships with issuers, including but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that appear on this site are from companies who pay us. This compensation may impact how and where products appear on this site, including for instance, the order in which they be listed within the categories of listing in the event that they are not permitted by law. This applies to our mortgage or home equity products, as well as other home loan products. However, this compensation will not influence the information we publish, or the reviews that you read on this site. We do not cover the entire universe of businesses or financial deals that may be accessible to you.



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5 minutes 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.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to take control of their finances with clear, well-researched information that breaks down complicated subjects into bite-sized pieces.









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If you're thinking about it the possibility of bankruptcy, there are options to help keep your vehicle from being repossessed -- even if you haven't paid off the auto loan. In many states, you may be able to avoid repossession of your vehicle through bankruptcy code exemptions, but the rules vary between states. Can you protect your car through bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy contain provisions that you may be able to keep the car you purchased with secured loan.


How to keep your car through Chapter 7 bankruptcy Car loans are , meaning the car is used as collateral to pay back the loan. Since the car is used in the capacity of collateral it could be repossessed by the lender in the event that you fail to make payments on the debt. However under Chapter 7, the most frequent bankruptcy for individuals, you have a few options for hanging on to your vehicle. "To keep your car while going through Chapter 7, the debtor must be current and stay current with the lender and perform a'redemption or redemption,' which is paying off the lender or executing a 'reaffirmation,' which could mean altering the loan terms, but this is subject to lender approval," says Lamar Hawkins, a bankruptcy attorney with Guidant Law. Here's how redemption and reaffirmation are done: Redemption: Obtaining redemption is a way to pay your creditors the vehicle's actual fair market value. If you can afford to do this it can make your life simpler in the future since you'll have eliminated car payments. However, since most people file for bankruptcy in a time where cash is scarce, this may not be a viable option. Reaffirm: This option allows you to continue making payments on your loan prior to filing for bankruptcy. When you reaffirm your debt, you agree a second time to continue to pay according to a timetable set by both you and your lender, which may include revised loan terms. Bankrate's tip
If neither option is working for you financially, you can surrender your vehicle to the creditor and have the debt discharged.


"When you receive the Chapter 7 Discharge, you will have no more personal responsibility to pay the loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor can do is take their collateral -that is, your vehicle. They are not able to take you to court for cash." The bankruptcy exemptions when you file in Chapter 7, your assets are sold off or liquidated to pay creditors. However, a bankruptcy court permits the holder to retain a certain amount of your possessions up to a specific amount of money, as per Debt.org. This is called the "exemption." This is the federal exemption limit is $4,000. However, some states set their own limits that must be adhered to -- some states' exemptions are higher than $4,000, while others are lower. Your value for your car in a bankruptcy filing is not determined by the amount you paid for it. In the majority of states, value is based on the value of the car's cash value determined by factors like the car's year, make and mileage. Sources from the automotive industry like Kelley Blue Book or Edmunds could be used to determine the worth of your car. If the value of your vehicle is found to be lower than your state's exemption limit, then you will be allowed to keep the car even when you file for bankruptcy. However when the vehicle is more valuable than the exemption, bankruptcy trustees may decide to sell the vehicle in order to pay your creditors. This is how it works If the state's exemption is $4,000, and your vehicle's worth is $2,000, then you'll likely be able to keep the car because it's value is less than what's allowed. If, on the other hand the exemption in your state is $4,000 and your car is worth $10,000, then the bankruptcy trustee could sell the vehicle and utilize the proceeds to pay off your debt. There are a variety of reasons why you should not keep your car in Chapter 7 bankruptcy Keeping your vehicle may not be feasible when you file Chapter 7 bankruptcy. In some cases, it doesn't make sense financially to hang on to the car. In deciding these issues, the value of your vehicle and the equity in the car play a key role. Equity in the car and bankruptcy similar to a mortgage for a home, equity is determined by subtracting the amount you owe on your car loan from the actual market price. "For instance, if you have a car with an estimated fair market value of $10,000 and a 1,000 loan balance, you have equity of $9,000," says Rosenblum. In the event that your equity amount is more than the exemption that a bankruptcy trustee may decide to sell the vehicle and use the proceeds towards paying off debts. It doesn't make financial sense for you to hold on to the car.. Lastly you should keep the fact that the vehicle's value at the moment is reflected on the car loan then keeping the car won't necessarily be a wise financial move. "Very often there is a situation where the loan balance is greater than the value of the vehicle and, if there is no way or motivation to keep the car the bankruptcy filer will let it go," says Michael Sullivan an expert in personal finance of the non-profit financial counseling company Take Charge America. How do you keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options to keep your vehicle. "The Chapter 7 framework is the basis for Chapter 13," says Rosenblum. "But when you enter Chapter 13, you reorganize your debt." Making a payment plan As an element in Chapter 13 debt reorganization, an initial three to five-year repayment plan will be created that factors in your income and assets. The purpose for Chapter 13 is to Chapter 13 process is to enable you to keep your possessions, such as your car, while paying off your debt. In addition, if you're late on your payments, the process will oblige you to make up the gap and pay on time moving forward. Revising the conditions for the loan The court may also demand that the lender revise the car loan conditions, which could include lowering the interest rate, this is another method to help you keep the car. If the terms are changed, the monthly payments will be less. "A Rewrite of the debt owed to the lender is possible through a Chapter 13 plan, and market conditions can be imposed upon the lender," says Hawkins. The reduction of the loan balance altering auto loan terms in the context the process of Chapter 13 may also include the process known as a "cramdown," which reduces the amount you have to pay the lender in proportion to your car's fair market value. The timeline of your car purchase is a significant factor when it comes to the cramdown process. In particular, there is the 910 rule which applies to the cramdown process. Newer cars If you purchased your vehicle within 910 days of your bankruptcy application, you must pay the full value of the loan but the rate of interest may be decreased. Older cars: If you purchased your vehicle more than 910 days before filing for bankruptcy You're only required to pay back the vehicle's reasonable market price. Reasons you wouldn't keep your car during Chapter 13 bankruptcy In certain circumstances, it may not be possible to keep your vehicle when trying to file for Chapter 13, or hanging on to it may not be the best option. Some instances where this might be the case include: Your loan has been in arrears and you do not have the financial resources in order to make the loan up to date or to continue making monthly payments. In this situation it is possible to surrender the vehicle. The car isn't in good condition or not reliable. In these conditions, selling the car could be a better option. The car is highly valuable and selling it could yield cash in order to repay your obligations. There is a significant equity stake in the car that surpasses the bankruptcy exemption thresholds in your state. The bottom line Filing bankruptcy does not automatically mean a car purchased with a secured loan will be repossessed. In each of the Chapter 7 and Chapter 13 bankruptcy codes, you can secure your car. Consulting a bankruptcy attorney can assist you in deciding which bankruptcy option is the best option for your personal financial situation.


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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.



Editor: Rhys Subitch Edited by Auto loans editor

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






Auto loans editor




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