If you are considering filing for bankruptcy, one of the biggest concerns may be what happens to your car and auto loans. Bankruptcy can be overwhelming and complicated, and it’s essential to understand how it affects your car loan. Here’s what you need to know about bankruptcy and your car.
Chapter 7 Bankruptcy and Your Car
In most cases, individuals who file for Chapter 7 bankruptcy can keep their assets, including their cars. Many states, including Alabama, offer exemptions for motor vehicles. This allows each adult to keep their car, assuming that:
- The equity in the car is under the exemption amount.
- They own the car outright or are current on payments.
- They make a payment arrangement before filing for bankruptcy.
Unlike some other types of bankruptcy, there is no option to refinance and catch up on payments under Chapter 7 bankruptcy. You will need to work out a payment plan with the financing company before filing your petition for bankruptcy if you are behind in your payments but hope to keep your car. If you do not, the loan will likely be listed for discharge, prompting them to repossess the vehicle. Other options that you can consider are paying off the car or refinancing the vehicle. Both of these options rely on the finance company working with you. An attorney from the Harris Firm can give you advice on which option would work best for you and how to approach it.
Chapter 13 Bankruptcy and Your Car
Chapter 13 bankruptcy is a reorganization bankruptcy that may help individuals restructure their debts into a three-to-five-year payment plan. If you have an auto loan, it may be included in the payment plan.
In Chapter 13 bankruptcy, you may be able to keep your car and continue making payments on the auto loan. The payment plan may even allow you to catch up on missed payments and pay off the auto loan at a lower interest rate. If your car’s value is less than the amount of the auto loan, the payment plan can possibly be negotiated to reduce the loan to the car’s fair market value. This means that you’ll pay off the auto loan based on the car’s actual value, not the amount of the loan. This can result in significant savings.
Automatic Stay
One of the benefits of bankruptcy is the automatic stay, which goes into effect as soon as you file for bankruptcy. The automatic stay prevents creditors, including auto lenders, from repossessing your car or collecting on a debt during the bankruptcy process. This means that if
you’re behind on auto loan payments or facing repossession, the automatic stay can provide you with some breathing room, and you can use this time to figure out a plan to keep your car.
Reaffirmation Agreement
Signing a reaffirmation agreement with your auto lender in Chapter 7 bankruptcy allows you to keep your car as long as you continue to make payments on the auto loan. However, be aware that by signing a reaffirmation agreement, you are taking on a new debt obligation that is not dischargeable in bankruptcy. This means that if you default on the auto loan payments later, the lender may be able to sue you for the balance owed on the auto loan.
Bankruptcy can be a hard time for anyone, but it does not mean you have to lose everything you own, including your car. When filing for bankruptcy, your car loan may be affected in different ways depending on the type of bankruptcy you file for and your specific financial situation. While bankruptcy can complicate your auto loans, there are ways to keep your car in both Chapter 7 and Chapter 13 bankruptcy. A reaffirmation agreement, reducing the amount of the auto loan, and negotiating a new payment plan are a few of the options available to holders of auto loans during bankruptcy. It’s essential to understand the effects of bankruptcy on your car loan and the options available. It’s best to speak to a Madison bankruptcy attorney who can guide you through the process and help you make an informed decision.