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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 providing you with interactive financial calculators and tools that provide objective and original content. This allows you to conduct research and compare information at no cost to help you make financial decisions with confidence. Bankrate has agreements with issuers such as, 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 website are provided by companies that compensate us. This compensation may impact how and when products are featured on this site, including the sequence in which they appear within the listing categories and other categories, unless prohibited by law for our mortgage, home equity and other products for home loans. This compensation, however, does affect the information we provide, or the reviews you read on this site. We do not include the universe of companies or financial offers that may be open to you.



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5 minutes read. Read on 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.







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 control their finances through providing clear, well-researched information that break down complex subjects into bite-sized pieces.









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If you're thinking of doing so alternatives, there are some to help keep your car from being taken away even if you aren't able to fully repay the auto loan. In several states, you could be able to stay away from repossession of your vehicle through bankruptcy code exemptions, but the rules vary from state to state. Are you able to protect your vehicle by filing bankruptcy?
Each Chapter 7 and Chapter 13 bankruptcy contain provisions that you could be able to keep a car that you purchased with secured loan.


How do you keep your car through Chapter 7 bankruptcy Car loans are secured, which means the car is pledged as collateral to pay back the loan. Since the car is used in the capacity of collateral it could be taken by the lender when you do not make payments on the debt. However under Chapter 7, the most frequent bankruptcy for individuals has a number of options to hold on to your vehicle. "To maintain a car when you go through Chapter 7, the debtor has to be current and current with the lender, perform a 'redemption,' which involves making payments to the lender, or perform a 'reaffirmation,' which may require changing the loan conditions, but it will require lender consent," says Lamar Hawkins, a bankruptcy lawyer with Guidant Law. This is how reaffirmation and redemption works: Redemption: The process of pursuing redemption is a way to pay your creditors for the car's actual reasonable market value. If you can afford to do this it can make your things easier later on because you'll have eliminated car payments. However, because the majority of bankruptcy filings are made in a time where cash isn't readily available it's not an option for you. Reaffirm: This option permits you to continue to pay on your loan prior to filing for bankruptcy. In reaffirming your debt, you agree to continue making payments according to a timetable agreed upon by both you and your lender that could include amended loan conditions. Bankrate's tip
If neither option is working for you financially then you may be able to surrender your vehicle to the creditor and get the debt eliminated.


"When you are granted an Chapter 7 Discharge, you will have no more personal responsibility to pay the loan," says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. "All the creditor can do is take their collateralthe car. They cannot pursue you for money." Exemptions from bankruptcy you file to file for Chapter 7, your assets are sold off or liquidated to pay creditors. But a bankruptcy court allows you to keep a certain amount of your property up to a specific amount of money, as per Debt.org. This is known as an "exemption." The Federal exemption limit is $4,000. However, many states have their own exemption limits that must be adhered to Certain states' exemptions are higher than $4,000 and some are less. What you can expect to receive for your car in bankruptcy filings is not determined by the amount was the cost. In most states, value is determined by the actual value of the vehicle determined by factors like the year, model, and mileage. Sources from the automotive industry like Kelley Blue Book or Edmunds may be used to determine the value of your vehicle. If your car's current value is found to be less than your state's exemption limit, then you'll be able to keep the vehicle even though you're filing for bankruptcy. On the other hand when the vehicle is worth more than the exemption limit, bankruptcy trustees may decide to offer the car for sale to help repay your debts. Here's how it works If the exemption for your state is $4,000, and your vehicle's worth is $2,000, then you're likely to be permitted to keep the vehicle because it's worth less than the exemption. If however the exemption for your state is $4,000 and your car is worth $10,000, then a bankruptcy trustee may sell the car and use the proceeds to pay off debt. The reasons you shouldn't keep your car during Chapter 7 bankruptcy Keeping your car may not always be possible when filing Chapter 7 bankruptcy. Plus, sometimes it simply does not make financial sense to hang on to the vehicle. When sorting through these questions, the value of your vehicle and the equity in the vehicle are crucial factors. Car equity and bankruptcy Similar to a mortgage for a home equity is determined by subtracting what you still owe on the loan from the current market value. "For example, if you own a vehicle with an appraised value of $10,000 with an outstanding 1,000 loan balance, you'll have $9,000 of equity," says Rosenblum. In the event that your equity amount is higher than the exemption, a bankruptcy trustee could choose to sell the car and apply the proceeds toward paying off your debts. It doesn't make financial sense keeping the vehicle. Finally consider keeping to your mind your car's fair market value is included in the loan and you want to keep the car will not be a good financial choice. "Very often it is the case that the loan balance is greater than what you can get for the vehicle and, without the funds or the desire to keep the car, the bankruptcy filer will let go of the vehicle," says Michael Sullivan, a personal financial consultant of the non-profit financial counseling company Take Charge America. How to keep your car during Chapter 13 bankruptcy Chapter 13 bankruptcy offers a variety of options for keeping your car. "The Chapter 7 framework is the basis of Chapter 13," says Rosenblum. "But with Chapter 13, you reorganize your debt." The process of creating the payment plan is a part the Chapter 13 debt reorganization, an initial three to five-year repayment plan will be developed which takes into account your earnings and assets. The aim for the Chapter 13 process is to enable you to keep your possessions, such as your vehicle, while paying the debt. If you're in a position to fall behind in your payments, the program will need you to make up the gap and make timely payments moving forward. Revision of the conditions that apply to your loan The court could also order that the lender amend the car loan conditions, such as lower interest rates, this is another method to help you keep the vehicle. If the terms are changed, the monthly payments will be lower. "A restructuring of the debt owed to the lender could be done by way of the process of a Chapter 13 plan, and market terms may be imposed upon the lender," says Hawkins. Reducing the loan balance altering your auto loan conditions as part in Chapter 13 may also include the process called a "cramdown," which reduces the amount you pay to the lender in proportion to your car's actual market value. The timing of your purchase of a car is a crucial aspect in a cramdown. In particular, there is the 910 rule which applies to the cramdown process. Newer vehicles If you purchased your vehicle within 910 days of your bankruptcy application, you have to pay the full value of the loan however, the rate of interest may be reduced. Older cars: If purchased your car more than 910 days before filing for bankruptcy You're only required to repay the car's current fair market value. Reasons you wouldn't keep your car in Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your car when pursuing Chapter 13, or hanging on to your car might not make sense. Some instances where this might hold true include: The loan has been in arrears and you do not have the financial resources for bringing the loan current or the ability to make ongoing monthly payments. In this case, you may have to sell the car. The car isn't in good condition or unstable. In these situations, selling the car could be a better option. The car is highly valuable, and selling it could provide cash to pay off your outstanding debts. You have significant equity in the vehicle, which surpasses the bankruptcy exemption thresholds in your state. The final result Filing bankruptcy does not automatically mean that a car bought with a secured loan is repossessed. In each of the Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. Working with 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 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 the confidence to control their finances with clear, well-researched information that break down complicated topics into digestible chunks.






Auto loans editor




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