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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 mission 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 financial decisions with confidence. Bankrate has partnerships with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The products that appear on this site come from companies that pay us. This compensation could affect how and when products are featured on the site, such as, for example, the order in which they may be listed within the categories of listing in the event that they are not permitted by law. Our mortgage home equity, mortgage and other products for home loans. However, this compensation will not influence the content we publish or the reviews that appear on this website. We do not contain the entire universe of businesses or financial offerings that could be available to you.



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5 minutes read. published 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 editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to take control of their finances with concise, well-researched and well-researched content that break down complex topics into manageable bites.









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If you're thinking about it alternatives, there are some that can help you keep your car from being taken away -- even if you haven't fully repaid your auto loan. In some states, you might be able avoid repossession of your car through bankruptcy code exemptions, though the laws vary between states. Can you protect your car by filing bankruptcy?
The two chapters Chapter 7 and Chapter 13 bankruptcy have provisions that you might be able keep a vehicle that you bought using a secured loan.


How to preserve your vehicle by filing Chapter 7 bankruptcy Car loans are secured by the vehicle, which means that it is pledged as collateral to back the loan. Since the car is used as collateral, it could be taken away by the lender if you fail to keep up with the payments. However in Chapter 7, the most well-known bankruptcy for people there are a variety of options for hanging on to your vehicle. "To keep a vehicle while being in Chapter 7, the debtor must be current and in good standing with their lender and perform a'redemption that involves paying back the lender, or perform a 'reaffirmation,' which could mean altering the loan terms, but this is subject to lender consent," says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. The following is how reaffirmation and the redemption process works: Redemption: The process of pursuing redemption means paying your lender for the actual reasonable market value. If you can afford to do this it can make your life simpler in the future because you'll no longer have to pay for car loans. However, because the majority of people file for bankruptcy at a time when cash is not readily available, this may not be a viable option. Reaffirm: This option permits you to continue making payments on your loan prior to filing for bankruptcy. When you reaffirm your debt, you agree to continue making payments according to a schedule agreed upon by the creditor and you, which may include revised loan terms. Tips from Bankrate
If neither of these options is a good fit financially for you You can also surrender your vehicle to the creditor and get the debt eliminated.


"When you get an Chapter 7 Discharge, you are no longer liable for personal responsibility to pay your loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor can do is take their collateral -that is, your vehicle. They can never take you to court for money." The bankruptcy exemptions when filing for Chapter 7, your assets are liquidated or sold to pay your creditors. The bankruptcy court will allow that you keep specified amount of your assets in excess of a specified amount of money, as per Debt.org. This is known as"exemption. "exemption." The federal exemption limit is $4,000. However, some states set their own limit which must be followed -- some states' exemptions are more than $4,000 while some are less. Your value for your car when you file bankruptcy is not determined by the amount the price you spent on it. In many states, the value is tied to the car's actual cash value depending on factors such as the year, model, and mileage. Car industry sources like Kelley Blue Book or Edmunds could also be used to help determine the value of your car. If your car's current value is determined to be lower than your state's exemption limit, you will be allowed to keep the vehicle even when you file for bankruptcy. On the other hand in the event that the car is more valuable than the exemption limit, bankruptcy trustees may decide to offer the car for sale to help you pay off your creditors. This is how it works If the state's exemption is $4,000 and your car's value is $2,000, you will likely be allowed to keep the vehicle since it's value is less than the exemption. If however the exemption in your state is $4,000 and your car is worth $10,000, the bankruptcy trustee can sell the car and make use of the profits to pay off your debt. There are a variety of reasons why you should not keep your vehicle during Chapter 7 bankruptcy Keeping your vehicle may not be possible when making a Chapter 7 bankruptcy. In some cases, it doesn't make sense financially to hang on to the vehicle. When sorting through these questions the worth of your vehicle and the equity in the vehicle are crucial factors. Car equity and bankruptcy Similar as a mortgage on an investment property equity is determined by subtracting the remaining amount owe on your car loan from the vehicle's present market value. "For example, if you own a vehicle with an estimated fair market value of $10,000 and the 1,000 loan balance, you'll have equity of $9,000," says Rosenblum. If the equity is higher than the exemption, a bankruptcy trustee could choose to sell the car and put the proceeds towards the repayment of your debts. It's not economically sensible keeping the vehicle.. Lastly consider keeping in mind that if your vehicle's value at the moment is included in the loan then keeping the vehicle will not necessarily be a wise financial move. "Very often there is a situation where the loan balance is more than what you can get for the car, and without the means or motivation to keep the car the person filing bankruptcy lets go of the vehicle," says Michael Sullivan who is a personal financial advisor working with the non-profit financial counseling agency Take Charge America. How to save your car through Chapter 13 bankruptcy Chapter 13 bankruptcy offers a variety of options for keeping your car. "The Chapter 7 framework is the foundation for Chapter 13," says Rosenblum. "But with Chapter 13, you reorganize your debt." Making the payment plan is a part the Chapter 13 debt reorganization, the three-to-five-year repayment plan is created which takes into account your income and assets. The purpose in Chapter 13 is to Chapter 13 process is to let you keep your possessions, including your vehicle, while paying the debt. If you're in a position to fall behind on payments, the plan will need you to make up the gap and pay your debt on time going forward. Revision of the terms that apply to the loan The court could also require that the lender amend the car loan conditions, such as decreasing the interest rate which can help you keep the vehicle. With revised terms, the monthly payments will be lower. "A Rewrite of the debt due to the lender can occur through a Chapter 13 plan, and market terms may be imposed on a lender," says Hawkins. Reducing the loan balance altering your auto loan terms as part in Chapter 13 may also include what's called the "cramdown," which reduces the amount you must pay the lender in proportion to your car's fair market value. The timeline of your purchase of a car is an important factor in a cramdown. Particularly, there is a 910 rule that applies to Cramdowns. Newer cars: If you bought your car within 910 days of your bankruptcy filing, you are required to pay the full value of the loan, though your interest rate may be decreased. Older vehicles: If you purchased your vehicle more than 910 days prior to filing for bankruptcy You're only required to pay the current reasonable market price. There are a variety of reasons why you should not keep your car in Chapter 13 bankruptcy In certain situations, it might not be possible to keep your car while you are pursuing Chapter 13, or hanging on to your car might not make sense. The scenarios where this could hold true include: The loan has been in arrears, and you do not have the financial resources to bring the loan up to date or to continue making monthly payments. In this case it is possible to give up the vehicle. The car is not in good condition or not reliable. Under these circumstances, simply surrendering the vehicle could be more sensible. The car is particularly valuable, and selling it could yield money for the repayment of your outstanding debts. There is a significant equity stake in the vehicle, which is greater than the bankruptcy exemption levels in your state. The bottom line Filing bankruptcy does not mean that a car bought with a secured loan will be repossessed. Under each of the Chapter 7 and Chapter 13 bankruptcy laws, there are provisions to protect your vehicle. A bankruptcy lawyer can help you decide which bankruptcy option is the best option for your 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.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances by providing precise, well-studied information that break down complex topics into manageable bites.






Auto loans editor




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