How To File For Bankruptcy And Keep Your Car

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is a short process, generally lasting only four to six months. During this time, your court-appointed bankruptcy trustee is responsible for selling your assets and using the proceeds to pay off your creditors. The creditors are typically only paid an agreed-upon portion of your debt, and any debts remaining after the Chapter 7 bankruptcy is discharged are wiped away.

When you file a Chapter 7 bankruptcy, which is also called a liquidation bankruptcy, you have to fill out forms listing your assets, debts, living expenses, and exempt property for a period going back two years. This information is used by your bankruptcy trustee to help them liquidate some of your assets, and determine which you can keep.

The property you’re allowed to keep – known as exempt property – is determined by the state you live in. Most states allow you to keep some of the value of your home, as well as items of necessity such as clothing, home furnishings, tools of your trade, and a vehicle. The value you’re allowed to exempt for these items varies by state, and if the value of your car is over the exemption limit, you could lose it.

Due to its short nature, some lenders are hesitant to work with borrowers who are in this process.

Once your bankruptcy is discharged it's usually easier to qualify for an auto loan. Your credit score also takes a hit during bankruptcy, so preparing for a bad credit car loan doesn't hurt. Chapter 7 stays on your credit reports for seven to 10 years.

As for keeping your car, your situation determines the options that may be available to you.

Keeping Your Car When Filing Bankruptcy

If you own your vehicle free and clear you should be able to keep it if it falls under your state's exemption guidelines. The amount of value that you're allowed to keep depends on your state, and whether you choose to take your state’s minimum exemption or the federal minimum exemption; not all states give you this choice so be sure to check with your court-appointed trustee.

If your car is worth more than the amount you're allowed to exempt, you may be able to save it by combining a wildcard exemption with your vehicle exemption. If this isn't enough to cover the value of your vehicle your trustee is likely to sell your car and distribute the proceeds to your creditor to repay some of your debt. If this happens, you're typically given the exemption amount which can be used to purchase an affordable vehicle.

Can You Keep Your Car Loan in Chapter 7 Bankruptcy?

If you have a loan on your vehicle you typically have two options, but this may depend on whether you're current on your loan when you file Chapter 7.

Luckily, as soon as you file Chapter 7 bankruptcy, an automatic stay goes into effect, stopping creditors from collecting debts you owe or from repossessing your vehicle. This gives you time to decide which course of action to take with your car.

In a Chapter 7 bankruptcy, if the equity in your vehicle meets or is below the exemption amount, you can keep your car one of two ways:

1. Reaffirm your loan – When you reaffirm a loan in a Chapter 7 bankruptcy, you’re not including it in your bankruptcy. Instead, you and the lender agree that you’re going to continue making payments, and you remain responsible for the debt after the bankruptcy has been discharged. For reaffirmation to work, you must prove that you can afford your loan payments. If you can’t, the court can deny the agreement, and your vehicle can be repossessed.
2. Redeem the car – To redeem your vehicle, you make a lump sum payment to your lender for the value of the car. This can be a saving grace if you have negative equity because you pay the current market value of the vehicle, not the loan balance. The difference is then wiped out in your bankruptcy. If you can’t come to an agreement with the lender of the car’s value, the court decides.

If you’re unable to use either of these options, and the equity in your vehicle is above the exemption amount in your state, you won't be able to keep your car if you can't come up with the cash to make up the difference. However, you can surrender it.

Giving the vehicle back to the creditor during a Chapter 7 bankruptcy wipes out the debt, since you aren’t responsible for the amount owed not covered by the sale of the car.

If you're behind on your loan you may not get the chance to use these options, as your lender isn't obligated to extend them to you if you've already defaulted on your loan. Additionally, if you're able to reaffirm, know that any late or missing payment results in automatic repossession by your lender.

Can You Lease A Car While In Chapter 7

If you're leasing a vehicle you must decide upfront whether you plan to keep the car or return it to the dealership. You have 30 days from filing to fill out your paperwork stating your intention. You can choose to either assume your lease or reject your lease.

To assume your lease means you agree to keep it and make all your lease payments throughout your bankruptcy. If you miss one you forfeit the deal and your lessor can repossess the car.

If you reject your lease you return the car and are free from all liability and the responsibility to make up any payments after your Chapter 7 is discharged.

Need Another Vehicle During Bankruptcy?

If you need a vehicle during your Chapter 7 bankruptcy, you have to get permission from your trustee. It may be easier to get an inexpensive vehicle for cash, but if you can wait until your bankruptcy discharge, you won't need court approval to take on more debt and may have an easier time getting an auto loan.

Even during Chapter 7, there's still a chance that you can finance a vehicle, as long as you're working with the right type of lender. Seeking a special finance dealership that works with bad credit borrowers after bankruptcy is likely the way to go. We know how difficult it can be to find a dealer to work with in tough credit situations, so we want to make your search as smooth as possible.

At Auto Credit Express, we've gathered a nationwide network of special finance dealers that are signed up with subprime lenders. These lenders work with borrowers who have little to no credit, or who have past bankruptcy on their credit reports.