Yes, you can discharge your auto loan in a Chapter 7 bankruptcy. We cover how discharges with vehicles work, and options you can explore if you want to keep your car.
What Is a Discharge in a Bankruptcy?
When you discharge a debt in bankruptcy, you’re relinquishing responsibility of it and the creditor can no longer come after you for the balance. However, if you surrender and discharge your auto loan, then the lender takes the vehicle.
If you no longer want to pay for your car, you can surrender it. After you surrender your vehicle in a Chapter 7 bankruptcy, it’s handed back to the lender, you’re no longer responsible for paying on it, and you aren’t responsible for the auto loan balance after your bankruptcy is discharged.
While you're financing a car, the title has a lien on it, which says the lender owns the vehicle until you finish paying off the loan. When you choose to discharge your auto loan, you can voluntarily surrender it or the lender sends a recovery company to repossess it.
However, you may not have to discharge your car loan. There are processes in place that can allow a Chapter 7 filer to keep their vehicle in some situations.
Any Chance I Can Keep My Vehicle in a Chapter 7 Bankruptcy?
Yes, there’s a chance you can keep your current car while you’re in Chapter 7 bankruptcy – but you can’t have your cake and eat it, too! If you want to keep your vehicle, you need to continue paying on it in some form, or pay the entire loan off at once. You can’t completely discharge a secured debt and keep the item, too.
Good news, though, many people in Chapter 7 manage to keep a modest car. Luxury vehicles that exceed the maximum exemption amount are probably going to be sold by your trustee, but you have a few options if you want to keep your current modest car. Your final choice also is limited depending on the status of your auto loan:
- If you’re current on your vehicle payments, you can either pay the remaining loan balance in one lump sum called redemption. The loan is paid completely in this case, so the car is free and clear. In Chapter 7, you can ask the court for permission to pay the fair market price for the vehicle. Or, you can enter into a reaffirmation agreement with the lender, which usually means you keep paying on the car note like normal or you work with your lender in negotiating a payment plan.
- If you’re behind on your auto loan payments, you may be able to do a redemption and pay the entire loan balance, including your past due payments in one big amount. Or, you can try to enter a reaffirmation agreement with your lender, but since you’re behind on payments, the lender doesn’t have to accommodate you or make changes to your loan if they don’t want to. Keep in mind that lenders make money on you paying interest on your vehicle, so they may be willing to work with you if you’re quick on the draw and ready to negotiate.
The Aftermath of a Chapter 7 Bankruptcy
The Chapter 7 bankruptcy process is pretty quick, and it’s usually over within a matter of months. While the bankruptcy is likely to be reported on your credit reports for up to 10 years, you still have auto loan options once you’ve completed bankruptcy. Credit score damage is likely to happen, too, so you may need to apply with lenders that can see past a lower credit score.
Special finance dealerships are equipped to assist bankruptcy borrowers because they look at more than just credit reports. They evaluate your income, residency, work history, and your credit reports as a whole – that’s how they make loan decisions.
Once you’ve been discharged from bankruptcy, whether it be a Chapter 7 or a Chapter 13, you can usually get into a car loan right away. Finding a special finance dealer, though, can be a little tricky, so start right here instead.
Auto Credit Express has built a nationwide network of special finance dealerships, and we match bankruptcy borrowers to local dealers with the resources they need to get into their next auto loan. Begin your car shopping journey by filling out our auto loan request form, and we’ll look for a dealership in your area for no cost with no obligation.