Whether or not you get to keep your car during a bankruptcy depends on the type of bankruptcy you file. If you file a Chapter 13 bankruptcy, you often get to keep your vehicle and many of your other assets since it’s a reorganization bankruptcy. If you file a Chapter 7, you may be forced to give up your car in order to pay back your creditors since most non-exempt property is liquidated (sold), but it's still possible to exempt your vehicle in some cases.
Keeping Your Car during a Bankruptcy
If you file a Chapter 13 bankruptcy, you get to keep your car more often than not. According to the legal experts at Nolo.com, it may not be possible to keep it if your payment is too high, you have a second vehicle that's not seen as a necessity, or you have a lot of nonexempt equity you can't protect.
If you file for a Chapter 7 and have a car that’s at risk of being taken away, you have a choice of either keeping it or surrendering it. If you can’t afford the payment, the easiest route to take is to surrender the vehicle to the lender. You don’t have to worry about paying for the car once the bankruptcy has been discharged, although you no longer have the vehicle.
On the other hand, if your car is paid off and you don’t want to give it up, you may be able to keep it depending on its value.
Redeeming or Reaffirming Your Car
If your vehicle isn’t paid off, whether you should redeem or reaffirm your car depends on what your lender and state allows, in addition to your financial capabilities.
The first option, as long as the vehicle is used for personal reasons and isn’t of value to the bankruptcy case, is to redeem your car. A redemption is when you pay your lender the current market value of the vehicle in a single payment, according to Nolo.
If you’re given the option to reaffirm, you get to keep your car by getting current with the monthly payments. Not all states allow this, and even if yours does, your lender may not allow it, which means reaffirmation isn’t guaranteed.
In a reaffirmation agreement, you discuss payment options with your lender in order to keep the loan through the bankruptcy. Your lender then sends you an agreement letter, where you can choose to negotiate the current loan balance.
The Bottom Line
You may not be able to keep your vehicle during a bankruptcy, but it's less likely you lose it in a Chapter 13 than in a Chapter 7. Even if you are in danger of losing your car, you can explore the options of redemption and reaffirmation.
If you ended up losing your vehicle during a bankruptcy but recently had it discharged, all hope isn’t lost when it comes to getting another auto loan.
At Drivers Lane, we specialize in helping people with unique credit issues – such as bankruptcy – find a dealership that can help them get financed. Our service is free and doesn't put you under obligation to buy anything. Get started by filling out our car loan request form today.