What Happens To Your Car Loan If You File For Bankruptcy
Technically, nothing should happen to your car loan if you file for bankruptcy as long as you continue to make your monthly payments.
A creditor will not repossess your vehicle just because youve filed for bankruptcy. The Bankruptcy & Insolvency Act prohibits that action. As long as you can maintain your regular payments, you can maintain your possession of the vehicle.
That said, there are some exceptions:
- You will not regain your vehicle if the creditor repossessed it before you filed for personal bankruptcy.
- You will lose the vehicle if the creditor gave you notice that they intended to repossess it at least ten days before you filed for bankruptcy.
Surrendering Your Car In Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, walking away from a car that you are still making payments on is relatively simple. You list the lender on your filing statement and check the box that indicates that you intend to forfeit the vehicle. If you do this, you will not be responsible for the car loan after you are discharged from your bankruptcy.
Likewise, if you are leasing a vehicle before filing for Chapter 7 bankruptcy, you will be permitted to walk away from your lease contract.
Keeping The Lease And Making Up Lease Payment Arrears
If you are behind on your lease payments, you can still keep your car but you’ll have to make up the back payments through your plan.
Ongoing lease payments. Your bankruptcy trustee will pay these to the creditor through your plan. The advantages and disadvantages of this option are the same as if you were current on your payments .
Lease payment arrears. You can pay back lease payments through your Chapter 13 plan. However, because the length of the lease does not change in Chapter 13 bankruptcy, the arrears must be paid by the last day of the regular lease, at the latest. In fact, they may be due earlier because bankruptcy law entitles the lease creditor to have the late payments cured promptly. Although the bankruptcy code does not define “promptly,” bankruptcy courts have held that back lease payments should be paid over a three- to six-month time frame.
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Ready To Find Your Next Car
The bottom line is this: its sometimes possible to qualify for a lease after a Chapter 7 bankruptcy, but it isnt guaranteed. The key is to work with the right leasing company.
If you need assistance in finding a lease deal, we can help. On the other hand, if youre simply looking to finance with a bad credit auto loan, we can assist with that, too.
At CarsDirect, we work with a nationwide network of dealers that have the lending resources to handle unique credit situations. Our process is simple, free, and fast. Just fill out our car loan request form to get started right now!
The Vehicle Is Your Primary Means Of Transport
The vehicle needs to be used by you primarily as a means of transport. This can include various types of vehicles such as:
- car
- bicycle or
- boat.
This doesn’t include caravans, motorhomes and campervans. Your trustee can sell these even if they are under the equity set amount.
Your trustee can claim vehicles that you don’t use primarily for transport. For example, you own an unregistered motorbike as a collectors item.
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Often Vehicle Lease Debt Does Not Increase What You Pay
In most Chapter 13 cases a debt from surrendering your leased vehicle does not increase what pay in your case. That is, adding what you owe on the lease to your other general unsecured debts does not increase the amount that you pay into your pool of general unsecured debts.
There are two circumstances where that happens, one less common and other very common.
First, in some parts of the country you are allowed to pay 0% of your general unsecured debts. This happens if all you can afford to pay during your 3-to-5-year payment plan goes to your secured and priority debts. This leaves no money for the general unsecured debts. Paying 0% of the general unsecured debts means paying 0% on any vehicle lease debt.
Second, in most situations you end up paying the pool of general unsecured debts a specific amount of money. That amount is what you can afford to pay through the plan minus what goes to secured and priority debts. That specific amount gets divided up among the general unsecured debts. This amount being paid to the general unsecured debts does not increase if there is more of those debts. Adding the debt from the surrendered leased vehicle just reduces the amount other general unsecured debts receive. It does not increase how much you pay.
What Is Chapter 13
Chapter 13 is a type of bankruptcy. It is often referred to as a wage earners plan because it combines the individuals debts into one, affordable monthly payment. The debtor makes these monthly payments for a specified period. At the end of the repayment plan, any leftover debts are forgiven. A chapter 13 bankruptcy usually lasts for three to five years, depending on the terms set by the trustee.
People often have questions wondering if chapter 13 is right for them and what is included, or not included in the bankruptcy filing, including whether or not they can keep their auto lease.
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What Happens To A Car Lease In Chapter 7
The lease claim would receive payment, if at all, on a proportional basis with other unsecured creditors, such as credit card lenders. The debtor will lose possession of the car with rejection of the lease. Individual debtors are permitted to assume personal property leases, such as those for cars, in chapter 7.
Rejecting The Car Lease In Chapter 13
If you reject the lease and return the vehicle to the creditor, you are off the hook for the remainder of the lease payments. However, the creditor can file an unsecured claim with the bankruptcy court to recover for damages to the car or high mileage penalties. These debts would be added to your other unsecured debts some of your plan payments will go towards paying your unsecured debts and anything remaining at the end of your plan period will be discharged.
Advantages. You can get out of your lease payments, which is especially advantageous if they are high. In addition, if you’ve incurred mileage penalties or caused damage to the vehicle, you won’t have to pay these amounts back in full.
Disadvantages. You lose the vehicle shortly after your plan is confirmed. This could be a problem if you need a car. You will have to get court approval to purchase or lease another car, which can take time and make getting another car more difficult.
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Keeping A Car You Own Free And Clear
If you own your car free and clear, the next question you have to answer is âhow much is my car worth?â The answer – the carâs fair market value – determines whether you risk losing the car in a bankruptcy.
How much is your car worth?
If you sold your car today, as is, whatâs the most someone would pay you for it? Thatâs the value that matters. It doesnât matter how much the car cost when you bought it⦠thatâs old news. If youâve had your car for a few years, itâs no longer in the same condition as when you bought it. How much it cost then doesnât tell you how much itâs worth today.
It also doesnât matter how much you ended up paying for it by the time the car loan was finally paid off. That amount includes the interest you paid and depending on the interest rate on your auto loan, that can be quite a bit more than the car was ever worth.
Find out how much you can protect with an exemption
Filing a bankruptcy case is meant to give you a fresh start. Bankruptcy exemptions exist to make sure everyone filing a bankruptcy case can keep their most basic possessions. Depending on the state youâre filing in, and how long youâve been there, you may be able to choose between the federal bankruptcy exemptions and the exemptions granted by your state law.
Getting additional protection by claiming a wildcard exemption
What if my carâs fair market value is greater than the exemption amount?
Chapter 13 bankruptcy can help, too!
Can I Keep My Leased Car During Bankruptcy
Yes, it is possible to keep a leased car if you file for personal bankruptcy in Canada, but certain conditions will apply.
First, some background. There are two types of creditors: secured and unsecured. Unsecured creditors are included in a bankruptcy once the bankruptcy starts, you are not allowed to pay them. Secured creditors have security registered against one of your assets, such as a car or a house if you dont pay them, they can repossess the asset.
Your leasing company is obviously a secured creditor the car is the asset that they are holding as security if you dont pay them, they can seize the vehicle, whether you are bankrupt or not.
Legally then you can keep a leased vehicle if you go bankrupt, provided you continue making your lease payments, and assuming the leasing company agrees. Most leases contain a clause that says that in the event of insolvency, the leasing company can terminate the lease, and repossess the vehicle. In most cases they wont do that, because they would prefer to continue getting lease payments for the life of the lease, but legally in many cases they can repossess the vehicle.
Therefore if you plan to go bankrupt, it is wise to review your lease agreement, and discuss it with your leasing company, to confirm that they will not take your vehicle if you go bankrupt.
There is, however, another issue to consider, and that is the issue of whether or not you should keep the car.
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Will Bankruptcy Affect My Job Or Future Employment
Twenty-nine percent of employers run a credit check on new job applicants, according to a survey by CareerBuilder. As a result, declaring bankruptcy could affect your ability to get a new job, especially if that job is in the financial services industry or with a government entity.
They do this primarily to make sure you’re a good fit for the jobssuch as handling moneyand that you’re not financially stressed, which could increase the likelihood of theft or fraud.
If an employer simply runs a routine criminal background check, however, your bankruptcy won’t show up.
It’s less likely that employers would conduct background checks on current employees. So if you’re not planning to switch jobs, you likely don’t need to worry much about a bankruptcy affecting your employment.
What If The Bankruptcy Exemptions Are Insufficient To Protect My Car
If your Exemption is not high enough to protect all of the equity available in your car, your car may still be protected.
Depending upon the amount of equity above the exemption amount, the Trustee may elect to abandon his or her interest in your car anyway, if the leftover amount is relatively small. This is because the Trustee will have to incur expenses to sell your car. If the cost of selling your car, plus the exemption amount, will not yield any money for creditors, it is unlikely the Trustee will want to sell your car.
For example, if the equity in your car is $5,000 and the available exemption totals $4,500, it is not likely the Trustee will sell your car to realize $500, given the cost to sell the car.
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What Will Filing Chapter 7 Bankruptcy Do To My Credit
While the fact that you filed a bankruptcy petition can remain on your credit report up to ten years, most Chapter 7 debtors find that their credit score rises shortly after their bankruptcy case closes because their debt-to-income ratio has improved. Also, while there are credit ramifications to filing a bankruptcy petition, defaulting on your lease and forcing the lessor to repossess the car hurts your credit too. Which would you prefer?
Can You Break A Vehicle Lease Or Car Loan In A Bankruptcy
While you can keep your car if you file insolvency in Canada, that does not mean you should. An expensive car lease payment can be one reason you face debt problems, especially after factoring in other costs of driving, including gas, insurance, and repairs.
You can file bankruptcy in Canada, give up your vehicle voluntarily, terminate the lease and eliminate any remaining obligation for future payments due to the end of the lease term.
There are several reasons why surrendering your leased, or financed vehicle makes sense:
- You can no longer afford the monthly payments.
- You owe more than the car is worth. Longer-term vehicle financing has resulted in many Canadians finding their car loan or lease underwater. Facing a debt after your vehicle is no longer serviceable makes no sense.
- You no longer need the vehicle. Working from home during COVID-19 has made many people living in a city like Toronto, for example, rethink ownership of a car entirely.
You can walk away from an auto loan or lease before filing for bankruptcy. You simply return the vehicle to the leasing company but make sure you do it before declaring bankruptcy. The lessor will then be responsible for selling or auctioning the vehicle for fair market value. Any lease payments owing above the sales proceeds become an unsecured debt that can be discharged by bankruptcy.
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Keeping A Car You’re Still Paying For
If you want to keep a car you are making payments on, no matter what else is going on in your bankruptcy, you should continue to make your payments as scheduled. You do have a choice, however, on how to keep the car: You can either pay the lender a lump sum to purchase the car at its current value , or enter into a new contract , which lets you keep your car under much the same terms as your original car’s promissory note .
Sometimes your lender will let you keep the car without entering into a reaffirmation agreement, by simply allowing you to continue to make the payments under the old agreement . If your lender has been accepting your payments, it’s a sign that you may be able to retain the vehicle and continue making payments without entering into a new reaffirmation agreement.
Can I Keep My Car If I File Chapter 7 Bankruptcy In 2021
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In a Nutshell
Most people can keep their car and get debt relief by filing bankruptcy. Of course, if you need a fresh start but you need your car just as much, you probably wonder about how this works in Chapter 7 bankruptcy. Keep reading to learn what a bankruptcy filing means for your car.
Written by Attorney Andrea Wimmer.
Most people can keep their car and get debt relief by filing bankruptcy. Of course, if you need a fresh start but you need your car just as much, you probably wonder about how this works in Chapter 7 bankruptcy. Keep reading to learn what a bankruptcy filing means for your car.
Is the car yours? Or are you still paying the bank for it?
Either way, itâs your property, called an asset, and is listed on Schedule A/B of your bankruptcy forms. The only exception to this general rule is if youâre leasing the vehicle.
Leasing the car?
If youâre not making car payments to anyone, you own the car free and clear.
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What Happens To Your Credit Score After Filing Bankruptcy
Chapter 7 bankruptcy and Chapter 13 bankruptcy filings show up on your credit report. How long it shows up depends on which type of bankruptcy you file. Chapter 7 bankruptcy stays on your credit report for 10 years after the filing date. A completed Chapter 13 bankruptcy stays on your credit report for 7 years after the filing date, or 10 years if the case was not completed to discharge.
As a result, filing bankruptcy will initially lower your credit score. How much your credit score will drop depends on how high or low it was before bankruptcy. Generally, a decrease between 100 to 200 points can be expected.
The good news is that you can begin rebuilding your credit as soon as your bankruptcy discharge is entered. It’s possible to have a better score within 1â2 years of filing. The credit scores of most bankruptcy filers are already lower because of missed payments. After the court grants a discharge, most unsecured debts are erased. Credit scores improve because there are no more missed payments and discharged accounts show a zero balance.
After Chapter 7 and Chapter 13 bankruptcy is filed, you will get credit card offers in the mail. These offers can be for secured credit cards, sometimes called prepaid cards, which require a cash deposit. Or, offers can be for unsecured credit cards, but will likely have high interest rates or annual fees.
