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Filing Bankruptcy On Car Loans

Car Equity And Bankruptcy

Can I finance a car loan in a chapter 13 bankruptcy?

Yet another consideration in bankruptcy filings is how much equity you have in a vehicle with an outstanding loan. Similar to a mortgage on a home, equity is determined by subtracting what you still owe on the car loan from the cars current market value.

For example, if you have a car with a fair market value of $10,000 with a $1,000 loan balance, you have $9,000 of equity, says Rosenblum.

If the equity is greater than the exemption, a bankruptcy trustee could choose to sell the car and apply the proceeds toward paying off your debts.

Bankruptcy Erases Car Loans But Not Car Liens

Bankruptcy works by breaking the contract requiring you to repay the lender for the car loan. You can file for bankruptcy, give the car back to the lender, and not pay anything further on the car loan.

However, if you want to keep a car with a car loan, there’s a catch. Filing for bankruptcy doesn’t eliminate the lien giving the bank the right to take back your car if you don’t pay as agreed. The bank can use the lien to repossess the car once the bankruptcy case is overor sooner with the court’s permissioneven though you erased the debt. So if you want to keep the car, you must pay for it.

How you pay your car loanand whether you can keep a car if you’re behind on the car loanwill depend on whether you file for Chapter 7 or 13.

Buying a car is costly, and most people can’t afford to pay for one outright. Instead, borrowers finance the purchase by signing a “promissory note” agreeing to pay back the debt with interest in monthly installments.

Because most car loans involve thousands of dollars, banks minimize risk by requiring the buyer to agree to put up the vehicle as collateral. The additional requirement creates a lien on the car that lets the lender repossess the car if the borrower “defaults” by failing to pay.

In bankruptcy, the lien makes the car loan a “secured debt,” unlike a Visa or Mastercard balance, which would be an “unsecured debt.”

Consider Getting A Replacement Car Before Bankruptcy

I often send clients planning on filing bankruptcy who are driving cars on their last legs out to shop for a new car.

And lots of them report back that they got a loan even with all the nasty debt still on their credit report.

The auto industry can be counted on to see that you can get a loan to buy their product!

My only admonition to them is to tell the truth on the loan application. To do otherwise creates problems far bigger than an unreliable car.

If you get a car loan on the eve of bankruptcy, you are also signing up to keep paying that loan through and after the bankruptcy.

Also Check: How Can You Find Out If Someone Filed Bankruptcy

Keeping Your Auto Loan In Chapter 13

The first thing that happens when you file for bankruptcy is that an automatic stay goes into effect, which halts all collection attempts on you until the details of the bankruptcy can be worked out. When you file Chapter 13, you’re saying that you can’t afford to pay everything right now, but you’re willing to work on it.

Chapter 13 is called a repayment bankruptcy and you’re assigned a trustee by the court to manage your finances during the process. Your trustee works out a budget and a repayment plan you have to stick to. Because you’re given time to pay your creditors, you typically get to keep property such as a reasonably-priced vehicle.

With the automatic stay in effect, your trustee can evaluate your auto loan situation and help you decide on a smooth route to take. If you’re planning on keeping your car loan when you file Chapter 13 you typically have two options, depending on the equity in your vehicle and if you’re current on payments.

Filing Bankruptcy When You Own The Car

Filing For Chapter 7 Bankruptcy Prevents Car Repossession?

A car loan is a secured debt, which means the car is collateral that can be taken back by the lender if you dont pay. When you file for Chapter 7 bankruptcy, you must list your assets on a form called Schedule A/B. Your car is an asset, because it has value. You must also file a statement of intention that that tells the court whether you plan to reaffirm your car loan, redeem the car or surrender it. If the statement of intention isnt filed within 30 days of when the bankruptcy is filed, the car loan is no longer part of the bankruptcy proceeding.

The first step to keeping your car if youre considering bankruptcy, is to determine its status. Youre either paying a loan, leasing or you own it free and clear. The status determines what you have to do to keep your car.

If youre making monthly payments on a car, its either a loan or a lease. If youre not sure which, check your agreement. If its a lease, you are renting the car and there are mileage limits that add costs when the lease ends and you return the car to the dealer.

If you are making monthly payments on a loan, the lender holds the title as collateral. Once youve paid for the car, you get the title and own it free and clear. If you cant make payments, the lender takes back the car back, which is repossession.

Being up to date on your car payments before you file for bankruptcy makes it much more likely youll keep your car when you file for either Chapter 7 or Chapter 13.

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Chapter 7 Bankruptcy And Your Auto Loan

It’s important to know how to file before you start your paperwork when it comes to Chapter 7 bankruptcy because you have to make certain determinations about filing right upfront. One thing you need to decide on before you file is what to do with your car loan.

When you have an auto loan, the vehicle secures the loan and your lender is listed on the title as a lienholder. This means they own the vehicle until you pay off the loan. If you file Chapter 7 bankruptcy before you’re done with your loan, you’re responsible for continuing payments if you want to keep the car.

If you can’t keep up with your loan the lienholder can repossess the vehicle. After they do this youre responsible for repo and storage fees, along with any deficiency balance left over after the sale or auction of the car.

If you think you can make arrangements to pay off or keep up with your loan, you typically have three choices during Chapter 7 bankruptcy:

  • Redeem your loan To redeem an auto loan you have to pay the lender the current market value of the vehicle in one lump sum. This option comes in handy if you have negative equity . For example, if you owe $5,000 on your auto loan, but your vehicle is only worth $3,000, you could keep your car and save $2,000 by redeeming your loan for the vehicle value. This is often difficult to do, though, especially if you’re considering filing for bankruptcy.
  • What Happens If I Fall Behind In Payments After Filing A Chapter 13 Bankruptcy

    The impacts of falling behind on payments in a chapter 13 case vary depending on the circumstances. If it is the first time that the filer has fallen behind and they are only a few days behind, there may not be any impact at all. If the filer has fallen behind several times and they are several months behind, then it could result in a dismissal of the case. Usually, if a consumer is falling behind, they should communicate with their attorney so that proactive steps can be taken. They should try to get their payments back on track as quickly as theyre able to. Contact the attorneys at Ziegler Diamond Law: Debt Fighters in Florida for a free case evaluation today. Attorney Mike Ziegler founded our law firm on the principles of professional quality and personal care.

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    File A Consumer Proposal To Keep Your Car And Other Assets

    A consumer proposal is not a bankruptcy. In a proposal you make a settlement offer to repay a portion of your debts. Any offer you make is affected by assets you own that are not exempt in a bankruptcy. However, in a consumer proposal, you keep all your assets, including your car and your home.

    A proposal may make more sense if you:

    • Own multiple vehicles
    • Own a car or truck worth more than the allowable limit
    • Can afford to make a settlement offer to your creditors.

    If you are struggling with debt, know that you dont lose everything when you claim bankruptcy. Book a free, no-obligation consultation with one of our Ontario Licensed Insolvency Trustees to explore your options.

    How Can I File Bankruptcy On A Car Loan

    Buying a Car After a Bankruptcy

    If I file for bankruptcy on my car loan, will I still be able to keep the car? Iâm having a lot of financial problems right now and this would help me.

    wonât be able to keep the carcollateralIf your payment on the loan is currentChapter Seven bankruptcyIf youâre behind on your paymentsChapter 13 bankruptcy

    Also Check: What Does It Mean When A Bankruptcy Case Is Dismissed

    Understanding Car Loan Preapproval

    Preapproval doesnt mean that youll always get accepted for a car loan, but it does mean that you have a better chance than someone who hasnt been preapproved. The great thing about most preapprovals is that they shouldnt impact your credit score as much compared to a real approval. Most preapproval applications wont affect your credit score at all.

    However, some will affect it to some extent, so youll want to be careful if you plan on applying for many loan preapprovals at once. A preapproval doesnt require as much information as a real car loan application. They just require enough information to determine whether or not you may be a good choice for a car loan.

    Getting preapproved for a car loan, of course, is a good sign. But if you are rejected, then you will have some work to do. If you are rejected for a car loan preapproval, then you certainly wont be accepted when you actually apply for a real car loan.

    If this happens to you, you shouldnt worry too much. This doesnt mean that it will be impossible for you to ever get a car loan. However, you will need to do some things so that your chances are better in the future.

    But how can you rebuild your credit after filing for bankruptcy?

    Considerations When Getting A Car Loan After Bankruptcy

    The effect of bankruptcy on your credit will be determined by how good or bad the credit was before filing for bankruptcy and how well did you maintain your credit after your filing. If the individual filing for bankruptcy had high credit scores and a good credit history before filing, there will most likely be a significant drop in the credit scores upon the bankruptcy filing. However, if the individual’s credit was already poor, there may not be much of an impact on his or her credit scores upon the filing. Another factor is the number of accounts included in the bankruptcy. If you include a lot of accounts, the hit to your credit scores will be bigger.

    Read Also: Can You Purchase A Car After Bankruptcy

    Connect With Our Team About Your North Or South Carolina Bankruptcy Today

    At Farmer & Morris Law, PLLC, we help clients with Chapter 7, Chapter 13, Chapter 11 reorganization, and Chapter 12 bankruptcy for family farmers. We have several offices to serve clients throughout North Carolina and South Carolina, including our main office in Rutherfordton, NC.

    If you think bankruptcy may be the best option for you, or if you have questions about your circumstances, call our team today: or contact bankruptcy attorney.

    Struggling With Your Car Payments Bankruptcy Can Stop Repossession

    viseodesigns: North York Personal Bankruptcy

    Our bankruptcy attorneys can stop repossession and in many cases draft a plan that lets you get current on delinquent car loan payments. We have helped hundreds of clients with auto loans. We can also help you decide whether keeping the car makes financial sense or not. And if you want to keep your car, we can advise how filing bankruptcy can help with your car payments. If you are struggling to get current on your car payment and want to stop repossession of your vehicle, then Chapter 13 bankruptcy offers a payment plan that can help you do that.

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    If You Fully Own The Caryou Lose It In Bankruptcy If Its Worth More Than A Certain Amount

    If there is no loan or lien on your vehicle, then your bankruptcy trustee will assess your vehicles value. In most provinces across Canada, if you go bankrupt, you get to keep one vehicle that is worth up to a certain amount depending on your province. Here are the maximum vehicle values for the following provinces:

    • Ontario: $6,600
    • Manitoba: $3,000
    • Saskatchewan: $10,000

    If your vehicle is assessed and found to be worth more than the allowed maximum in your province, you can redeem it from being taken in the bankruptcy by paying the difference between its appraised value and the maximum limit. So if your province allows you to keep a vehicle worth up to $5,000 and yours is appraised at $6,000, you could pay your trustee the $1,000 difference. He or she would then put this $1,000 into the pool of money that they would send to your creditors. You would then get to keep your car and not lose it in the bankruptcy.

    Where To Find Auto Loans After Bankruptcy

    When shopping for your auto loan, consider options outside of the dealership. Here are some of the best auto lenders for bad credit.

    $7,500 or more Refinance loans

    You could also consider your local credit union. Credit unions in particular tend to offer products to help people rehabilitate their finances and may be more flexible in dealing with post-bankruptcy issues. However, a credit union may not do business with you if your bankruptcy discharge includes debts owed to them.

    To find a lender who will work with your credit issues, you may have to shop around. If your loan applications get declined, be sure to ask the lender how you can improve your chances of approval next time.

    Also Check: What Does A Bankruptcy Discharge Paper Look Like

    Pay Less For A Financed Car Using Chapter 7 Redemption

    Suppose you owe $10,000 on your car loan, but the car is worth only $5,000. You can redeem the loan by paying the lender $5,000 to keep your vehicle free and clear.

    The benefit of redemption is you’ll pay less if you owe more than the car is worth. It will also fix a late payment problemyou’ll either own the car or be current after financing with another lender.

    The downside? You must pay the current value in full in one payment. You’ll need to use funds you protected with a bankruptcy exemption when you filed, or money earned, given to you, or borrowed after filing your bankruptcy case. Some people turn to friends, family, or a lender specializing in redemption loansbut it’s not cheap. You should count on getting a high interest rate.

    Does It Depend On The Type Of Bankruptcy

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    The type of bankruptcy you go with will significantly affect what happens to your car. If you file for Chapter 7, youll be able to keep your vehicle as long as local bankruptcy laws exempt all your equity and youre up to date on your loan payments.

    To figure out how much equity you have in your car, take your loan balance and subtract it from the value of your car. Note that if youre close to the end of your term, you may not have a lot of equity as vehicles depreciate quickly.

    After you know how much equity you have, find the motor vehicle exemption in your state. If you have less equity than the exemption limit, you shouldnt have any issues keeping your car. Because Chapter 13 involves a debt repayment plan and doesnt liquidate assets to repay creditors, your property wont be sold. This means if you own your car, it will likely be yours to keep.

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    How To Use The Can You Keep Your Car In Chapter 7 Bankruptcy Chart

    Do you have your figures? Great! You’re ready to use the chart. But first, take a second to notice that you’ll lose your car in Chapter 7 bankruptcy when:

    • you can’t protect the equity, or
    • you’re behind on your car payment.

    The reason in both situations is essentially the same.

    Chapter 7 is quick and wipes out qualifying debts in about four months without requiring you to pay anything to creditors. Because it’s quick, you won’t have time to catch up on your car payment or pay to keep a car with a lot of nonexempt equity. That’s what Chapter 13 bankruptcy is forit lets you fix these problems using the three- to five-year Chapter 13 payment plan.

    In Chapter 7, the trustee will sell your car if you can’t protect the equity and give you the exemption amount. And if you’re not current on the car loan when you file for Chapter 7, the lender will use its lien rights to get it back by either:

    Now that you understand the elements, check the chart. You’ll learn more about redemption below.


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