What Happens to a Car in Bankruptcy?

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Oct 22, 2023

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Bankruptcy is a legal mechanism designed to offer individuals and businesses a fresh start when they find themselves drowning in unmanageable debt. When contemplating bankruptcy, it's essential to understand how this process can affect your assets, particularly your car. The outcome regarding your vehicle largely depends on the type of bankruptcy you file and your specific circumstances. In a Chapter 7 bankruptcy, your car's fate hinges on its equity, while Chapter 13 provides a more structured approach to managing car loans. Whether you can keep your car, reaffirm the loan, or face the possibility of repossession, it's crucial to navigate these complexities carefully, ensuring that you emerge from the bankruptcy process with a clearer financial path ahead.

In this article

What is bankruptcy?

Bankruptcy is a legal process designed to help individuals and businesses alleviate overwhelming debt when they cannot meet their financial obligations. It serves as a mechanism for individuals to gain a fresh financial start or for businesses to reorganize and continue their operations. Bankruptcy laws vary by country, and in the United States, there are different chapters of bankruptcy, including Chapter 7, Chapter 13, and Chapter 11, each with its own set of rules and requirements.

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What happens to a car in bankruptcy?

The fate of your car during bankruptcy largely depends on the type of bankruptcy you file and the specific circumstances surrounding your case.

Chapter 7 bankruptcy

In Chapter 7 bankruptcy, also known as liquidation bankruptcy, non-exempt assets are sold to repay creditors. However, some exemptions allow you to protect a certain amount of equity in your car. If your car's equity exceeds the allowed exemption amount in your state, the bankruptcy trustee may sell the vehicle to repay creditors. You can also reaffirm the car loan, which means you agree to continue making payments for the loan and keep the vehicle. This allows you to maintain ownership if you can demonstrate the ability to make payments.

Chapter 13 bankruptcy

Chapter 13 bankruptcy involves creating a repayment plan over three to five years to partially or fully satisfy your debts. Your car may be included in this plan. You can often keep your car in Chapter 13 bankruptcy, even if you owe more than it's worth. The repayment plan will outline the terms of your car loan. Consistently making the agreed-upon payments is crucial to retaining your car throughout bankruptcy.

Ways to protect your car during bankruptcy

To safeguard your vehicle during bankruptcy, consider the following strategies:

Determine equity: Calculate the equity in your car and compare it to the exemption allowed in your state. Equity is more likely to be protected if it falls within the exemption limits.
Reaffirmation: In Chapter 7 bankruptcy, you may opt to reaffirm the car loan, which allows you to keep the vehicle by agreeing to continue making payments.
Redemption: Another option in Chapter 7 bankruptcy is redemption, where you can buy the car's current market value in one lump sum payment or through a redemption loan.
Consult with an attorney: Seek the counsel of a bankruptcy attorney who can guide you through the process and help you navigate the complex rules and regulations governing car ownership in bankruptcy.

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FAQs

What happens if I default on my car loan during bankruptcy?

Defaulting on your car loan during bankruptcy could lead to repossession. It is crucial to make all agreed-upon payments to retain the vehicle.

Can I buy a new car during bankruptcy?

Acquiring a new car during bankruptcy may be challenging, as it can affect your ability to complete your repayment plan or be viewed as an unnecessary expense. Consult with your bankruptcy attorney before making such decisions.

Can I include my car loan in my bankruptcy plan?

Yes, you can include your car loan in your bankruptcy plan, particularly in Chapter 13 bankruptcy, where a repayment plan is created to manage your debts.

Pros and cons

Pros

Immediate relief from creditor harassment and collection efforts.
A chance for a fresh financial start.
Protection from foreclosure, repossession, and wage garnishment.
Ability to reorganize and manage debts in an organized manner.

Cons

Negative impact on credit score and credit report.
Possible loss of assets in Chapter 7 bankruptcy.
Bankruptcy filing becomes a matter of public record.
Limited access to credit in the short term.

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The bottom line

Understanding what happens to your car in bankruptcy is crucial when facing overwhelming debt. The outcome largely depends on the type of bankruptcy you file, the equity in your car, and your ability to make payments. While bankruptcy can provide relief and a path to financial recovery, it is essential to weigh the pros and cons carefully and seek professional guidance to make the best decisions for your unique situation. Ultimately, bankruptcy should be seen as a tool to regain financial stability, not as a final defeat.

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