If you’re considering filing for bankruptcy, one of the most common questions you may have is whether or not you’ll be able to keep your car. This is a valid concern, as most people rely on their vehicles to get to work, school, and other important appointments.
The answer is: it depends. The rules regarding keeping your car during bankruptcy vary depending on the type of bankruptcy you file, the value of your car, and how much equity you have in it. In this article, we’ll break down what you need to know in order to determine if you can keep your car during a bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is often called "liquidation" bankruptcy because some assets may be sold off in order to pay back creditors. However, that doesn’t mean that everything will be taken away from you. In fact, many people are able to keep their cars during a Chapter 7 filing.
The key factor is how much equity you have in your car. Equity refers to the difference between the value of your car and how much you owe on it. For example, if your car is worth $10,000 and you owe $5,000 on it, then your equity is $5,000.
In most states, there are exemptions for personal property (like a car) that can be kept during bankruptcy filings. These exemptions allow you to protect some or all of the equity in your car so that it won’t be sold off by the trustee assigned to your case.
However, every state has different exemption laws and they can change over time. You’ll need to check with an experienced bankruptcy attorney in your state to find out what exemptions are available to you.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is often called "reorganization" bankruptcy because instead of selling off assets like Chapter 7, you create a repayment plan that lasts three to five years. The repayment plan is designed to help you catch up on missed payments and pay off as much of your debt as possible.
If you file for Chapter 13 bankruptcy, you may be able to keep your car even if you have significant equity in it. The reason for this is that the repayment plan will take into account the value of your car and the amount of equity you have in it.
For example, let’s say that your car is worth $20,000 and you owe $10,000 on it. That means you have $10,000 in equity. However, if your total unsecured debt (like credit card debt) is $50,000, then your repayment plan may require that you pay back at least $10,000 (the amount of equity in your car) to creditors.
If you’re unable to make these payments under the terms of the repayment plan, then your car may be sold off by the trustee assigned to your case.
There are several other things to keep in mind when it comes to keeping your car during bankruptcy:
Secured vs Unsecured Debt
Secured debts are those for which there’s collateral. For example, a car loan or mortgage is a secured debt because if you stop making payments, the lender can repossess or foreclose on the item securing the loan.
Unsecured debts don’t have any collateral attached to them. Credit card debt and medical bills are two examples of unsecured debts.
In both Chapter 7 and Chapter 13 bankruptcies, secured debts are treated differently than unsecured debts. In order to keep a secured asset like a car or home during bankruptcy proceedings, you’ll need to continue making payments on those loans.
A reaffirmation agreement is a contract between you and a creditor that allows you to keep a secured asset (like a car) after bankruptcy proceedings have ended. Essentially, you agree to keep making payments on the loan in exchange for being allowed to keep the asset.
Reaffirmation agreements are typically used during Chapter 7 filings, as Chapter 13 plans already take secured assets into account. However, reaffirmation agreements can be risky because if you default on the loan after signing the agreement, you’ll still be liable for the debt and may not be able to discharge it in future bankruptcy proceedings.
If you’re struggling to make payments on your car loan or mortgage, you may be able to work with your lender to modify the terms of your loan. This could include refinancing at a lower interest rate or extending the length of your repayment period.
Loan modifications can be helpful outside of bankruptcy if you’re simply trying to avoid defaulting on a loan. However, they can also be useful during bankruptcy proceedings if they allow you to keep a secured asset like a car without having to reaffirm the debt.
So, can you keep your car if you file bankruptcy? The answer is yes – but it depends on several factors, including what type of bankruptcy filing you choose, how much equity you have in your car, and whether or not you continue making payments on any secured debts.
It’s important to remember that every situation is unique and that there’s no one-size-fits-all answer when it comes to bankruptcy. If you’re considering filing for bankruptcy and want more information about how it will impact your ability to keep your car or other assets, consult with an experienced bankruptcy attorney today.
Can I keep my car if I file bankruptcy if it’s fully paid-off?
Yes, you can. When you file for bankruptcy, you’re entitled to certain exemptions, including one for your vehicle. If it’s fully paid off and worth a certain amount (varies by state), it likely falls under the exemption limit and can be protected.
What happens if my car is worth more than the exemption limit in my state?
If your car is worth more than the exemption limit in your state, you may have to turn over the excess value to creditors or negotiate a payment plan with them. Alternatively, you may be able to use other available exemptions to protect additional equity in your home or other assets.
Can I keep making payments on my car loan even if I file for bankruptcy?
Yes, you can continue to make payments on your car loan after filing for bankruptcy and keep your vehicle as long as you stay current on those payments. Bankruptcy only absolves past debts, not future obligations like ongoing car loan payments.
What happens if I fall behind on my car loan after filing for bankruptcy?
If you fall behind on your car loan after filing for bankruptcy, your lender may seek permission from the court to repossess the vehicle. To prevent this from happening, it’s important to stay current on all of your secured debt payments and work with a bankruptcy attorney who can help you navigate the process.
Can I include my car loan in a Chapter 7 bankruptcy discharge?
Yes, any unsecured debt (including a deficiency balance owed after a repossession) could potentially be discharged in a Chapter 7 bankruptcy proceeding. However, this would mean surrendering the vehicle itself unless an agreement can be reached with the lender to reaffirm the debt through a modified payment plan.
Can a Chapter 13 bankruptcy help me keep my car if I’m behind on payments?
Yes, a Chapter 13 bankruptcy can potentially allow you to catch up on past-due payments over a three- to five-year repayment plan, while keeping your vehicle. However, it’s important to work with an experienced attorney who can help you develop a feasible repayment plan that meets both your needs and the requirements of the court.
What is a reaffirmation agreement?
A reaffirmation agreement is a legal document in which you agree to continue making payments on a debt (such as a car loan) after filing for bankruptcy, even though it would otherwise be discharged. This may allow you to keep the asset secured by that debt (in this case, your vehicle), but also means you remain liable for any remaining balance owed if you default.
Will bankruptcy affect my ability to get auto financing in the future?
Yes, filing for bankruptcy can impact your credit score and make it more difficult or expensive to obtain future financing. However, there are options available for people who have filed for bankruptcy and need to purchase a vehicle, such as specialized lenders who work specifically with individuals who have poor credit.
Can creditors seize my car if I file for Chapter 7 bankruptcy?
If your car is considered non-exempt property under state law and its value exceeds any available exemptions, then yes – creditors may be able to seize it through the bankruptcy process. However, working with an experienced attorney can help prevent this from happening by identifying available exemptions or negotiating payment plans with creditors.
If I file for Chapter 7 bankruptcy and lose my car due to non-payment, will this affect other assets I own?
Potentially – creditors may try to recover other assets or money owed from you in order to make up for any losses they suffered as a result of the car repossession. However, working with an experienced attorney can help you minimize your exposure and protect other valuable assets from seizure or sale.