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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 better financial choices by offering interactive tools and financial calculators that provide objective and original content. We also allow you to conduct research and compare information for free to help you make sound financial decisions. Bankrate has partnerships with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that appear on this site come from companies that compensate us. This compensation may impact how and where products appear on the site, such as, for example, the order in which they may appear within the listing categories, except where prohibited by law. Our mortgage or home equity products, as well as other home lending products. This compensation, however, does not influence the information we provide, or the reviews you read on this site. We do not include the vast array of companies or financial offerings that could be available to you.



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5 minutes read. Published March 20, 2023
Writen 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.







The edit was done by 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 the confidence to control their finances with concise, well-researched and well-researched content that breaks down complicated subjects into bite-sized pieces.









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If you're thinking of doing so alternatives, there are some which can prevent your car from being repossessed -- even if you haven't paid off the auto loan. In several states, you could be able avoid repossession of your vehicle by using bankruptcy code exemptions. However, the laws differ between states. Can you protect your car through bankruptcy?
The two chapters Chapter 7 and Chapter 13 bankruptcy include provisions through which you may be able to keep a vehicle that you purchased with a secured loan.


How do you keep your car by filing Chapter 7 bankruptcy Car loans are , meaning the car is pledged as collateral in order to pay back the loan. Since the car is used to serve as collateral for the loan, it could be taken by the lender in the event that you fail to make payments on the debt. However in Chapter 7, the most popular bankruptcy for individuals has a number of options to hold on to your vehicle. "To maintain a car when going through Chapter 7, the debtor must be current and in good standing with their lender and perform a'redemption or redemption,' which is making payments to the lender or performing the'reaffirmation', which can involve altering the loan conditions, however this will require lender approval," says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. This is how reaffirmation and redemption works: Redemption: The process of pursuing redemption means paying your lender the vehicle's actual fair market value. If you can afford to do this it can make your life simpler later on because you'll be able to eliminate car payments. But because most bankruptcy filings are made at a time when cash isn't readily available and available, this might not be an option that is feasible. Reaffirm: This option allows you to continue to pay on your loan as before filing for bankruptcy. When you reaffirm your debt, you agree a second time to continue making payments according to a schedule that both you and your lender and may also include revised loan conditions. Bankrate tip
If neither option works for you financially then you may be able to give your car to the lender and get the debt wiped off.


"When you are granted the Chapter 7 Discharge, you are no longer liable for personal obligation to pay for your loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor has to do is take their collateral- your car. They can never take you to court for money." Exemptions from bankruptcy you file for Chapter 7, your assets are sold or liquidated to pay creditors. But a bankruptcy court allows the holder to retain a specific amount of your possessions up to a specific dollar value, according to Debt.org. This is called the "exemption." It is a federal exemption limit. Federal exemption limit is $4,000. However, some states have their own exemption limit which must be followed Certain states' exemptions are higher than $4,000, while others are lower. The value of your vehicle in a bankruptcy filing is not based on what was the cost. In many states, the value is tied to the actual value of the vehicle depending on factors such as the year of the vehicle, its make and mileage. Automotive industry sources such as Kelley Blue Book or Edmunds can be utilized to determine the value of your car. If the value of your vehicle is determined to be lower than your state's exemption limits, then you will be allowed to keep your car when you file for bankruptcy. However in the event that the car is valued higher than the exemption, bankruptcy trustees may decide to sell the vehicle in order to pay your creditors. This is how it works: If your state's exemption is $4,000 and your car's value is $2,000, you'll likely be able to keep the vehicle because it's value is less than the exemption. If however the exemption in your state is $4,000 and your vehicle is worth $10,000, the bankruptcy trustee can sell the vehicle and utilize the profits to pay off debt. The reasons you shouldn't keep your vehicle during Chapter 7 bankruptcy Keeping your vehicle may not be feasible when filing Chapter 7 bankruptcy. Sometimes, it doesn't make sense financially to hold on to your car. In the process of deciding on these issues, the value of your vehicle and the equity in your car are crucial factors. Equity in the car and bankruptcy similar to a mortgage on a home equity is calculated by subtracting the amount you owe on the loan from the car's present market value. "For example, if you own a vehicle with an estimated fair market value of $10,000 with an outstanding $1,000 loan balance, you have equity of $9,000," says Rosenblum. If the equity is greater than the exemption that a bankruptcy trustee may decide to sell the vehicle and apply the proceeds toward paying off debts. It's not financially sensible for you to hold on to the car.. Lastly, it's also worth bearing in mind that if your car's fair market value is reflected on the car loan and you want to keep the car won't necessarily be a wise financial move. "Very often it is the case that the loan balance is greater than the value of the car and, if there is no way or the desire to keep the vehicle, the filer lets it go," says Michael Sullivan, a personal financial consultant of the non-profit financial counseling company Take Charge America. How do you keep your car through Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options for keeping your car. "The Chapter 7 framework is the basis for Chapter 13," says Rosenblum. "But with Chapter 13, you reorganize your debt." Making the payment plan is a component of Chapter 13 debt reorganization, a three- to five-year repayment plan will be created which takes into account your income and assets. The goal in Chapter 13 is to Chapter 13 process is to enable you to keep your possessions, such as your vehicle, while paying back your credit card. In addition, if you're late on payments, the plan will oblige you to catch up and pay on time moving forward. Revising the conditions for your loan The court could also require that the lender modify the car loan terms, including lower interest rates, which can aid in keeping the car. If the terms are changed, the monthly installments will be lower. "A restructuring of the debt due to the lender is possible via a Chapter 13 plan, and market terms may be imposed upon a lender," says Hawkins. Reducing the loan balance altering your auto loan terms in the context in Chapter 13 may also include what's known as the "cramdown," which reduces the amount you have to pay to the lender according to the vehicle's reasonable market value. The timeframe of your purchase of a car is a crucial aspect in a cramdown. In particular, there is a rule of 910 that applies to the cramdown process. Newer vehicles If you purchased your car within 910 days after your bankruptcy, then you must pay the full value of the car loan but the rate of interest may be decreased. Older cars: If you purchased your car more than 910 days before filing bankruptcy then you're only required pay back the vehicle's fair market value. Reasons you wouldn't keep your vehicle during Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your car while pursuing Chapter 13, or hanging on to your car might not make sense. Some instances where this might apply include: The loan is in arrears and you don't have the funds for bringing the loan current or to make ongoing monthly payments. In this scenario you might have to sell the car. The car is not in good shape or is unreliable. Under these circumstances, simply giving up the car may make more sense. The car is extremely valuable, and selling it would provide money in order to repay your outstanding debts. You have significant equity in the vehicle, which is greater than the bankruptcy exemption levels in the state you reside in. The bottom line Filing bankruptcy does not mean a car purchased with a secured loan is repossessed. Under each of the Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. Consulting a bankruptcy attorney can assist you in deciding which bankruptcy option makes the most sense for your financial circumstances.


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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 since the end of 2021. They are dedicated to helping readers gain the confidence to manage their finances with precise, well-studied information that break down complicated subjects into bite-sized pieces.






Auto loans editor




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