Are you facing bankruptcy due to the COVID-19 pandemic or any other reason? If you play your cards right, you may be eligible to keep your car loan – depending on the bankruptcy you file and the outcome you're looking for.
Your Bankruptcy Filing Chapter Matters
When you go into bankruptcy with a vehicle loan, you must be current on the payments if you want to hold out hope for being able to keep your car. Many people think that filing for bankruptcy allows them to somehow keep a vehicle without paying for it. That's not the case.
If you're in danger of losing your car, filing bankruptcy can temporarily prevent a lender from sending a recovery company to collect the vehicle with an automatic stay. But this doesn't last forever, and it may not even last throughout your entire bankruptcy.
How your auto loan is treated during a bankruptcy largely depends on the bankruptcy chapter you file, and how much your lender is willing to work with you. As a bankruptcy filer, you have a greater chance of losing your car in a Chapter 7 than a Chapter 13 bankruptcy.
Chapter 7 is a liquidation bankruptcy, in which your court-appointed bankruptcy trustee sells your nonexempt assets in order to repay your creditors. The Chapter 7 process is short, and generally only takes between four and six months to complete.
A Chapter 13 bankruptcy, on the other hand, is known as a repayment bankruptcy, and your trustee draws up a plan for you to pay back your creditors over a three- or five-year period.
Using Bankruptcy Exemptions to Cover Vehicle Value
If you're unable to protect assets such as a vehicle or a home with bankruptcy exemptions during a Chapter 7, you run the risk of losing them. In the U.S., bankruptcy exemptions have two uses depending on which bankruptcy you file: protecting property so that it can't be sold, or determining repayment values. Exemption limits vary by state, and there's a federal exemption amount as well.
Sometimes, you're able to choose whether you take the state exemption or the federal one; only 20 states allow residents to choose, though. Whether you're able to choose or not, you can't cherry-pick between state and federal exemption limits – if you choose the federal exemption amounts, you must use them for all your exemptions. It's important to go over the exemption amounts with your trustee so that you make the choice that makes the most sense for your overall situation.
In a Chapter 7 bankruptcy, if the value of your property isn't covered by an exemption, it's sold by your trustee to help pay down your debt. After a successful Chapter 7, any debt that wasn't covered completely is typically eligible to be wiped away.
In a Chapter 13 bankruptcy, there's no need to use an exemption to protect your property, as it's not sold to repay your debts. Instead, exemption amounts are used to determine the amount you owe through your repayment plan over the course of your bankruptcy.
Keeping Your Car Loan During Bankruptcy
In order to keep your car during a Chapter 7 bankruptcy when you still have an auto loan, you typically have two choices: redemption or reaffirmation.
- Redemption is typically a bit more difficult for bankruptcy filers to achieve because you're required to pay the fair market value of your vehicle to the lender in one lump sum. The value of the car is determined by the book value used by the lender, such as Kelley Blue Blue, NADAguides, or Black Book.
- Reaffirmation is the process of signing a new contract with your lender, called a reaffirmation agreement, which lets you keep your vehicle and loan under its current conditions or similar terms, depending on what your lender agrees to.
You're not required to do anything special to keep your auto loan in a Chapter 13 bankruptcy. You must keep up with your repayment plan, or you risk defaulting on your car loan, and on your entire bankruptcy as well.
Unable to Save Your Auto Loan?
If you're unable to work out a way to save your auto loan during your bankruptcy, or you decided that you could do without the expense, chances are that you're going to need another vehicle once you're done. Getting a car loan after a successful bankruptcy discharge isn't impossible. However, you're likely to need a subprime auto loan.
This is because your credit score can take a major hit during bankruptcy. People with lower credit scores usually need to go through a special finance dealership that's signed up with bad credit lenders. These lenders generally take a more in depth look at your financial and credit situations to get a better picture of your creditworthiness. Subprime lenders don't work with every dealer, though, so it can be difficult to pinpoint where to start.
You can avoid the hassle by beginning right here with Auto Credit Express. If you're looking for a dealership for your next car loan, we want to match you to one in your area. The process is fast, free, and simple to get started. Just fill out our auto loan request form, and we'll get to work finding a local dealer for you!