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There are several ways to keep your car after you file for Chapter 7 — the most extreme form of bankruptcy. Even if you have a car loan, there are a few options to rework repayments to fit your current budget.
An exemption is a bankruptcy law that lets you keep certain assets when you file for bankruptcy. A motor vehicle exemption lets you keep a car or other vehicle by protecting some or all of the equity that you own in the vehicle. Most states have limits to how much equity you can claim.
If your car’s value is fully or mostly covered by the state exemption, you can keep your car. If not? The contractor appointed to manage your case — called the trustee — can sell the car to pay off your creditors and reimburse you the exemption amount.
Say you own a car with a market value of $5,000. You live in a state that offers a $6,000 motor vehicle exemption. After claiming your exemption, you get to keep your car.
But say you lived in a state where the exemption was only $3,000. In that case, the trustee could repossess the car, sell it and send you a check for $3,000.
Some states also have a wildcard exemption, which you can use to protect any property you choose. You can use this to cover the remaining value of your car if it’s worth more than your state’s exemption. Often the wildcard exemption is lower than the motor vehicle exemption.
A reaffirmation agreement is a new contract with your lender that lets you take your car loan out of the bankruptcy proceedings. Generally, you’ll get a reduced interest rate and loan balance.
But the bankruptcy court must approve it first. If you don’t have solid proof of income to cover repayments, you won’t be approved. And if you default, the lender can sue you — and you won’t have the option to file for bankruptcy again for another eight years.
This option allows you to trade in your current car loan for a new one with a balance that reflects the market value of your car. For example, if you owe $10,000 on a car that’s worth $7,500, your new balance would be $7,500 after a motion to redeem.
Like with reaffirmation, you’re required to get your new loan approved. After you find a lender and get approved for a loan, you must file for a motion to redeem with the bankruptcy court. The court and the two lenders will determine the fair market value of the car.
While technically not a part of bankruptcy law, some lenders may be willing to let you keep your car as long as you continue paying off your car loan on time. While they have the right to repossess your vehicle, many would rather not — that process can be expensive.
The downside to this option is that your lender can repossess your car at any time, even if you stick to the repayment schedule.
If you can’t afford your current car loan payments, you can talk to your lender yourself and try to come up with an agreement outside of the court. Some might be willing to lower your balance to reflect the market price of your vehicle.
You’ll generally need to be current on your payments for this to work. And credit unions are often more flexible than other types of creditors.
Yes, Chapter 13 bankruptcy generally lets you keep your assets, including your car. Unlike Chapter 7, which cancels most of your debts, Chapter 13 renegotiates your payment plans to fit your current income.
Bankruptcy doesn’t mean you have to lose your car. There are several options, even if you don’t fully own your car outright. But you might have a harder time holding on to your vehicle if you’re behind on your car loan repayments.
Find out more about how car loans work by reading our guide to auto financing. Or, check out our guide to bankruptcy to make sure it’s the right choice for you.
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