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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 mission is to help you make smarter financial decisions by offering interactive tools and financial calculators as well as publishing informative and trustworthy content. This allows you to conduct your own research and compare information for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear within the listing categories in the event that they are not permitted by law for our mortgage home equity, mortgage and other home loan products. However, this compensation will not influence the information we provide, or the reviews that appear on this website. We do not cover the entire universe of businesses or financial deals that may be accessible to you.



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5 minutes 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 the confidence to manage their finances through providing concise, well-researched and well-researched content that breaks down otherwise complex topics into manageable bites.









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If you're thinking of doing so alternatives, there are some that can help you keep your car from being taken away even if haven't paid off your auto loan. In several states, you could be able to avoid repossession of your vehicle by using bankruptcy code exemptions. However, the rules vary between states. Do you have the ability to safeguard your car through bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy contain provisions that you may be able to keep a vehicle that you purchased with secured loan.


How to keep your car by filing Chapter 7 bankruptcy Car loans are , meaning the car is pledged as collateral in order to pay back the loan. Because the car serves as collateral, it could be taken by the lender if you fail to maintain payments on the debt. However in Chapter 7, the most popular bankruptcy for individuals, you have a few alternatives to keep your car. "To maintain a car when being in Chapter 7, the debtor must remain current with the lender and perform a'redemption that involves paying back the lender or performing the'reaffirmation', which could mean altering the loan terms, but this will require lender consent," says Lamar Hawkins, a bankruptcy attorney with Guidant Law. The following is how reaffirmation and the redemption process works: Redemption: The process of pursuing redemption is a way to pay your creditors for the car's current reasonable market value. If you're able to make this happen it could make your things easier later on because you'll have eliminated 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 to pay on your loan prior to filing for bankruptcy. When you reaffirm your debt, you agree to make payments according to a timetable that both you and your lender and may also include revised loan conditions. Bankrate tip
If neither option works for you financially You can also sell your car to the lender and get the debt wiped off.


"When you are granted a Chapter 7 Discharge, you are no longer liable for personal responsibility to pay this loan," says Pennsylvania-based bankruptcy attorney Dai Rosenblum. "All the creditor is able to do is take their collateral -- your car. They are not able to sue you for money." The bankruptcy exemptions when filing in Chapter 7, your assets are sold off or liquidated to pay creditors. The bankruptcy court will allow that you keep specified amount of your assets up to a certain amount of money, as per Debt.org. This is referred to as the "exemption." The Federal exemption limit is $4,000. But many states set their own limit which must be followed -- some states' exemptions are more than $4,000, while others are less. Your value for your car when you file bankruptcy does not depend on the price you paid for it. In the majority of states, value is determined by the actual value of the vehicle depending on factors such as the year of the vehicle, its make and mileage. Car industry sources like Kelley Blue Book or Edmunds can be used to determine the worth of your vehicle. If the current value of your car is found to be less than your state's exemption limit, you'll be permitted to keep the vehicle even while you're filing bankruptcy. On the other hand, if the car is more valuable than the exemption, the bankruptcy trustee could decide to offer the car for sale to repay your debts. Here's how it works If the state's exemption is $4,000 and your car's worth is $2,000, then you're likely to be permitted to keep the vehicle because it's worth less than what's allowed. If you're on the other side the exemption for your state is $4,000 and your car is worth $10,000, a bankruptcy trustee may sell the car and use the profits to pay off your debt. Reasons you wouldn't keep your vehicle during Chapter 7 bankruptcy Keeping your vehicle may not be possible when making a Chapter 7 bankruptcy. In some cases, it does not make financial sense to try and hang on to your car. In deciding these issues, the value of your vehicle and the equity in the car will play an important role. The equity in your car and bankruptcy are similar to a mortgage for an investment property equity is calculated by subtracting what you still owe on the car loan from the car's current market value. "For example, if you have a car with an estimated fair market value of $10,000 and a 1,000 loan amount, you'll have $9,000 equity," says Rosenblum. If the equity is greater than the exemption the bankruptcy trustee can choose to sell the car and put the proceeds towards paying off debts. It's not financially sensible for you to hold on to the car.. Lastly, it's also worth bearing in mind that if your vehicle's current fair market value is on the car loan and you want to keep the vehicle will not necessarily be a good financial choice. "Very often there is a situation where the loan balance is greater than the value of the car and, if there is no way or the desire to keep the car, the bankruptcy filer will let go of the vehicle," says Michael Sullivan who is a personal financial advisor of the non-profit financial counseling company Take Charge America. How do you keep your vehicle through Chapter 13 bankruptcy Chapter 13 bankruptcy offers a variety of options for keeping your car. "The Chapter 7 framework is the basis of Chapter 13," says Rosenblum. "But in Chapter 13, you reorganize your debt." The process of creating the payment plan is a part of Chapter 13 debt reorganization, the three-to-five-year repayment plan will be developed that factors in your income and assets. The purpose in the Chapter 13 process is to enable you to keep your possessions, including your vehicle, while paying off your debt. In addition, if you're late in your payments, the program will oblige you to make up the gap and make timely payments moving forward. Revising the terms that apply to your loan The court may also order that the lender modify the car loan conditions, which could include lower interest rates, which is another way to aid in keeping the car. If the terms are changed, the monthly installments will be less. "A rewrite of the debt due to the lender can occur by way of the process of a Chapter 13 plan, and market conditions can be imposed on a lender," says Hawkins. The reduction of the loan balance The process of altering auto loan terms in the context the process of Chapter 13 may also include the process known as the "cramdown," which reduces the amount you have to pay the lender to the car's actual market value. The timeframe of your purchase of a car is a significant factor when it comes to the cramdown process. Particularly, there is a rule of 910 that applies to cramdowns. Newer cars: If you bought your vehicle within 910 days after your bankruptcy application, you are required to pay the full value of the car loan but the interest rate could be decreased. Older vehicles: If you bought your car after 910 days prior to filing for bankruptcy, you're only required to pay back the vehicle's fair market value. Reasons you wouldn't keep your car in Chapter 13 bankruptcy In certain situations, it might not be feasible to keep your car while pursuing Chapter 13, or hanging on to the car may not make sense. Examples of when this may hold true include: The loan is in arrears and you don't have the financial resources for bringing the loan up to date or to make ongoing monthly payments. In this case you might have to surrender the vehicle. The vehicle is not in good shape or is not reliable. Under these circumstances, simply surrendering the vehicle could be more sensible. The car is extremely valuable, and selling it could provide money for the repayment of your outstanding debts. There is a significant equity stake in the car, which exceeds the bankruptcy exemption levels in your state. The most important thing to remember is Filing bankruptcy does not mean that a car bought with a secured loan will be repossessed. In each of the Chapter 7 and Chapter 13 bankruptcy codes, you can secure your vehicle. Consulting a bankruptcy attorney can assist you in deciding which approach to bankruptcy makes the most sense for your personal 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.



The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain confidence to take control of their finances with concise, well-studied and well-researched content that break down complicated topics into manageable bites.






Auto loans editor




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