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How to file for bankruptcy and keep your car Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by offering you interactive tools and financial calculators as well as publishing informative and trustworthy content. We also allow you to conduct your own research and compare data for free to help you make financial decisions with confidence. Bankrate has agreements with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site are from companies who pay us. This compensation can affect the way and where products appear on this site, including, for example, the sequence in which they be displayed within the listing categories and other categories, unless prohibited by law for our mortgage or home equity products, as well as other home loan products. This compensation, however, does not influence the information we publish, or the reviews that you read on this site. We do not contain the universe of companies or financial offers that may be accessible to you.



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5 min read Published March 20, 2023
Writen by Mia Taylor Written by Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to control their finances by providing clear, well-researched information that breaks down complicated subjects into bite-sized pieces.









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If you're considering the possibility of bankruptcy, there are options which can prevent your car from being taken away -- even if you haven't fully repaid the auto loan. In some states, you might be able to stay away from repossession of your car through bankruptcy code exemptions, but the laws vary from state to state. Can you protect your car by filing bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy contain provisions that you could be able to keep a vehicle that you purchased with a secured loan.


How do you keep your car through Chapter 7 bankruptcy Car loans are secured by the vehicle, which means that it is used as collateral to back the loan. Because the vehicle serves as collateral, it could be taken away by the lender if you fail to make payments on the debt. However in Chapter 7, the most frequent bankruptcy for individuals has a number of options for hanging on to your vehicle. "To keep your car while being in Chapter 7, the debtor must remain in good standing with their lender and perform a'redemption,' which involves paying off the lender, or perform the'reaffirmation', which may require changing the loan terms, but this is subject to lender approval," says Lamar Hawkins, a bankruptcy attorney with Guidant Law. The following is how reaffirmation and the redemption process work: Redemption: Pursuing redemption involves to your creditor for the car's current worth. If you're able to do this, it may make life easier in the future since you'll be able to eliminate car payments. However, because the majority of bankruptcy filings are made in a time where cash isn't readily available, this may not be an option for you. Reaffirmation: This option permits you to continue making payments on your loan until you file for bankruptcy. By reaffirming your debt you sign a new agreement to make payments according to a schedule agreed upon by the creditor and you that could include amended loan terms. Bankrate tip
If neither option works financially for you You can also sell your car to the creditor and get the debt eliminated.


"When you are granted an Chapter 7 Discharge, you are no longer liable for personal obligation to pay the loan," says Pennsylvania-based bankruptcy lawyer Dai Rosenblum. "All the creditor is able to do is take their collateral -- your car. They cannot sue you for money." The bankruptcy exemptions when you file in Chapter 7, your assets are sold or liquidated to pay creditors. The bankruptcy court will allow the holder to retain a specified amount of your possessions up to a specific dollar value, according to Debt.org. This is known as"exemption. "exemption." The maximum federal exemption is $4,000. However, many States have their own exempt limits which must be followed Certain states' exemptions are higher than $4,000 while some are lower. Your value for your car in bankruptcy filings does not depend on the price you paid for it. In many states, the value is based on the value of the car's cash value depending on factors such as the car's year, make and mileage. Automotive industry sources such as Kelley Blue Book or Edmunds may be utilized to determine the worth of your car. If the value of your vehicle is determined to be lower than the state's exemption limit, you'll be permitted to keep the car even while you're filing bankruptcy. However when the vehicle is worth more than the exemption, bankruptcy trustees may decide to offer the car for sale to you pay off your creditors. This is how it works If the exemption for your state is $4,000 and your car's worth is $2,000, then you'll likely be able to keep the vehicle because it's worth less that the amount of exemption. If however the exemption for your state is $4,000 and your vehicle is worth $10,000, the bankruptcy trustee can sell the vehicle and utilize the funds to pay off your debt. Reasons you wouldn't keep your car during Chapter 7 bankruptcy Keeping your car isn't always feasible when making a Chapter 7 bankruptcy. In some cases, it doesn't make sense financially to try and hang on to the car. In deciding these issues the worth of your car and your equity in the car will play an important role. The equity in your car and bankruptcy are similar to a mortgage on a home equity is calculated by subtracting the amount you owe on the loan from the vehicle's actual market price. "For example, if you own a vehicle with an estimated fair market value of $10,000 and a $1,000 loan balance, you have equity of $9,000," says Rosenblum. In the event that your equity amount is greater than the exemption that a bankruptcy trustee may opt to dispose of the car and put the proceeds towards paying off debts. It's not economically sensible for you to hold on to the car. Finally you should keep to your mind the car's fair market value is reflected on the car loan and you want to keep the car won't necessarily be a good financial choice. "Very often, the loan amount is higher than the value of the vehicle and, if there is no way or the desire to keep the car the person filing bankruptcy lets go of the vehicle," says Michael Sullivan, a personal financial consultant of the non-profit financial counseling agency Take Charge America. How to save your car through Chapter 13 bankruptcy Chapter 13 bankruptcy provides you with a number of options for keeping your vehicle. "The Chapter 7 framework is the basis of Chapter 13," says Rosenblum. "But with Chapter 13, you reorganize your debt." The process of creating a payment plan As component in Chapter 13 debt reorganization, a three- to five-year repayment plan will be developed which takes into account your income and assets. The goal of the Chapter 13 process is to let you retain your possessions, which includes your car, while paying the debt. In addition, if you're late in your payments, the program will need you to make up the gap and pay your debt on time going forward. Revision of the conditions that apply to the loan The court may also order that the lender revise the car loan conditions, which could include lower interest rates, which can ensure that you can keep the vehicle. If the terms are changed, the monthly installments will be lower. "A Rewrite of the debt owed to the lender can occur via the Chapter 13 plan, and market conditions can be imposed upon the lender," says Hawkins. Reduce the loan amount changing auto loan conditions as part the process of Chapter 13 may also include what's known as the "cramdown," which reduces the amount you must pay the lender to the car's actual market value. The timeframe of your car purchase is a significant factor when it comes to the cramdown process. In particular, there's a rule of 910 that applies to Cramdowns. Newer vehicles If you purchased your car within 910 days of your bankruptcy, then you must repay the full amount of the car loan, though the interest rate could be reduced. Older cars: If you bought your car after 910 days before filing for bankruptcy, you're only required to pay the current actual market value. The reasons you shouldn't keep your car in Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your car when trying to file for Chapter 13, or hanging on to the car may not be a good idea. The scenarios where this could hold true include: The loan has been in arrears and you do not have the money for bringing the loan current or the ability to pay the monthly installments. In this scenario you might have to sell the car. The vehicle is not in good shape or is unstable. In these situations, giving up the car may be a better option. The car is particularly valuable, and selling it could yield money for the repayment of your obligations. There is a significant equity stake in the vehicle, which exceeds the bankruptcy exemption levels in your state. The most important thing to remember is Filing bankruptcy does not automatically guarantee that a vehicle purchased through a secured loan is repossessed. In the both Chapter 7 and Chapter 13 bankruptcy laws, there are provisions to protect your car. Consulting a bankruptcy attorney will help you determine which bankruptcy option is the best option for your financial situation.


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Written by a Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to helping readers gain confidence to take control of their finances by providing precise, well-studied information that breaks down otherwise complex topics into digestible chunks.






Auto loans editor




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