Are Interest Rates Affected Negatively By Filing Bankruptcy
Yes, filing bankruptcy can have a negative effect on interest rates for auto loans. You may find a lender who is willing to give you a car loan immediately after you complete a bankruptcy case, but you may pay a higher interest rate.;
However, the good news is that time takes care of that problem. Waiting just a year or two to apply for a new car loan could result in a lower interest rate, provided you have been working to improve your credit score during that time.
How Does Chapter 7 Bankruptcy Affect My Existing Mortgage
When you file Chapter 7, your existing property will be deemed either exempt or nonexempt. Exempt means youll be able to keep the property throughout the bankruptcy process, as long as you can catch up and stay current on your payments.
Nonexempt means you will either be required to surrender the property or pay its value in cash as a part of the bankruptcy. In some cases, people are allowed to keep nonexempt properties. It all depends on the bankruptcy trustee and how they choose to handle the property.
To understand how Chapter 7 impacts your existing home mortgage, you must first understand the difference between a loan and a lien.
When you get a mortgage, your mortgage company gives you a loan. They let you borrow money in order to buy a property. When they do that, they place a lien on the property. A lien is a right or interest in the property that the mortgage company has until the debt is paid in full.
When you file Chapter 7, you are no longer legally obligated to repay the loan. Legally obligated is the key phrase here because Chapter 7 does not get rid of the lien on the property. Your lender still has a right to the property if the debt is not paid.
So basically, you dont have to pay your mortgage. But if you dont you will lose your property because your lender will likely enforce the lien they have. If you are able to keep your home as part of Chapter 7, its probably a good idea to do everything in your power to keep paying your mortgage loan.
Considerations With A Car Loan After Bankruptcy
Your credit reports are a history of how well youve managed your finances. Unsurprisingly, bankruptcy will lower your credit scores.
The effect on your scores depends on your credit before bankruptcy. If you had high credit scores and a good credit history, youll likely see a significant drop in your scores. But if your credit wasnt strong to begin with, the impact to your scores may not be as big. Another factor is the number of accounts included in your bankruptcy the more accounts included, the bigger the hit to your credit scores.
These changes to your credit can pose some problems as you try to qualify for an auto loan.
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How Are Auto Loans Handled During A Chapter 7 Bankruptcy Case
A Chapter 7 bankruptcy case is restricted to individuals who cannot afford to repay their debts, business debtors, and corporations. Consumer debtors must meet the income requirements to receive a bankruptcy discharge in Chapter 7. Chapter 7 bankruptcy does not offer a repayment plan.;
Therefore, if you are behind on your car payments when you file Chapter 7, your options for keeping your vehicle are limited:
- Catch up the car payments immediately to keep the car.
- Redeem the vehicle by paying a lump sum payment to the creditor that is equal to the fair market value of the vehicle.
- Enter a reaffirmation agreement with the lender, which restructures the car loan. The danger of entering a reaffirmation agreement is that you reaffirm the debt. In other words, the debt is not impacted by the bankruptcy case. If you fall behind on the payments again, the creditor can take the car and seek a deficiency judgment.
A deficiency judgment is an amount you owe on the auto loan after the car is sold. Some states allow creditors to garnish wages for deficiency judgments. If you surrender your vehicle in Chapter 7, the creditor cannot seek a deficiency judgment.
Therefore, if you owe more on your car than it is worth, surrendering the car in Chapter 7 gets rid of the debt without the worry of a deficiency judgment.;
How Will Defaulting On My Car Loan Affect My Cosigner
If a family member or friend cosigned your car loan, theyre legally responsible for paying back your loan should you default. If they fail to do so, your cosigner will be hit with the same consequence youre facing, including a lower credit score and the risk of being sued over an unpaid deficiency balance.
Qualifying For A Cramdown
A cramdown is only available to borrowers that file Chapter 13.
If you file Chapter 7, the liquidation bankruptcy, it means your non-exempt assets are sold off to repay your creditors. Chapter 13 is the repayment bankruptcy where your court-appointed trustee crafts a repayment plan that allows you to repay your creditors as much as youre able according to your available income, which is why a cramdown is an option.
Here are the requirements for a cramdown:
- Your car has negative equity In order to cram down the loan, your vehicle must have negative equity, meaning you owe more than its worth.
- Youve had the vehicle for at least 910 days Its required that youve had your vehicle for at least 910 days before filing for bankruptcy to use a cramdown. According to the legal site Nolo.com, this rule was created to prevent borrowers from buying a vehicle, then immediately filing bankruptcy to discharge some of the balance.
- Your car payment is included in your repayment plan You may have had the option to not include your auto loan in your bankruptcy. If you chose to opt-out, you cant cram down the loan.
Think your vehicle is eligible? Talk to your court-appointed trustee about your options. Youre typically required to do a cramdown early on in the process since repaying the vehicle in cramdown is included in your repayment plan.
What Happens To Your Car In Chapter 13 Bankruptcy
Another form of bankruptcy is Chapter 13, which works a bit differently from Chapter 7. Rather than liquidating non-exempt assets to repay creditors, you’ll enter a debt repayment plan. Your property isn’t sold off with this form of bankruptcy; instead, your finances are reorganized and you’ll begin the process of repayment. If you own your car outright you’ll be able to keep it.
You will have a repayment period of either three or five years, and once that period ends, some remaining debts can be dischargedmeaning you don’t have to pay them anymore. Not all debts can be discharged, however. Credit card and medical debt can be discharged, for example, but mortgages and student loans cannot.
When you file Chapter 13 bankruptcy, your debt is grouped into three buckets:
- Priority debts: These must be repaid in full. This includes bankruptcy costs, unpaid tax bills from the past three years, and child and spousal support.
- Secured debts: Car loans are included in this category. If you have a car loan, the amount you owe on it may be reduced in the Chapter 13 bankruptcy process if you owe more on it than its current value. Also, if you can qualify for a repayment plan and get caught up on your loan, you may be able to keep the vehicle.
- Unsecured debts: These will be discharged in the bankruptcy after you’ve completed your repayment plan.
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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.
Keeping Your Car Chapter 7 Vs Chapter 13
People who file for bankruptcy generally have cars that are of less value than the average consumer, but they also have more of their wealth tied up in their car. The CBP car bankruptcy study points out that makes sense. People come to bankruptcy court with their wealth depleted, and the data bear out the intuition that people will hold onto their means of transportation if they can, the study says.
The numbers also show that Chapter 13 bankruptcy is a better bet for keeping a car than Chapter 7.
Chapter 7 bankruptcy involves liquidating assets to pay off unsecured debt, and even with the car exemption, it takes a lot of number crunching to keep your car.
Chapter 13 bankruptcy, ;on the other hand, creates a repayment plan that takes into account your income and assets, with an eye toward keeping what you own. Unsecured debt is discharged if the plan is successfully completed. Its an especially good option if you have a lot of equity in a car, though that equity will be considered part of the wealth that is the foundation of your payment plan. If youre behind on payments, the plan will include catching up.
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If You’re Unable To Keep Up With Your Loan
Once your cosigner files bankruptcy, they are no longer considered an option for repayment if you’re unable to pay your loan. This means that if you miss any payments, you’re in danger of repossession just as if you never had a cosigner to begin with.
If you find yourself in this situation after your cosigner has filed bankruptcy, your first step should be to contact your lender. As soon as you think you might fall behind, you should find out from your lender what your options are in order to avoid repossession and keep your loan in good standing. You might be surprised by some choices lenders can offer.
How Soon After Bankruptcy Can I Buy A Car
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Bankruptcy cases typically need to be discharged before car loans are possible unless its a Chapter 13 case and the court approves the loan. However, waiting and re-establishing credit may help you qualify and get better rates. Bankruptcies stay on your credit report for seven to 10 years, but that doesnt mean youre unable to borrow money during that time.
On the positive side, eliminating or reducing debt through a bankruptcy filing leaves borrowers with extra income to take on new debt and offers a fresh start. Creditworthiness increases as credit is rebuilt and the bankruptcy filing is further away in the rear-view mirror.
Conventional lenders may not consider applicants with a bankruptcy. Applicants may have to seek a;subprime auto loan;through a lender specializing in working with those who have had financial hardship and bankruptcy. When looking for a lender, be wary of loans that are guaranteed for anybody or offer no credit check. Loans with high-interest rates and fees may result in negative equity in a vehicle, where borrowers owe more than its worth.
Also Check: How Much Is It To File A Chapter 7 Bankruptcy
What About Chapter 13 What Happens With My Existing Mortgage
With a chapter 13 bankruptcy, borrowers will not lose their property. You will include details on how you plan on paying your mortgage in your repayment plan. In most cases, an automatic stay is issued once Chapter 13 is filed. An automatic stay means that creditors must stop collection efforts.
It was designed to temporarily halt foreclosure and stop repossession of homes regardless of the stage of the foreclosure proceedings. For homeowners with too much equity to qualify for a homestead exemption in their jurisdiction, this is an advantage of a Chapter 13 filing.
There are a couple of important caveats here: First, you have to stay current on any mortgage payments that are due after the filing. If youre behind on your payments, missed payments can be included in your reorganization plan, but you have to make sure all these debts are paid back by the end of your plan timeline.
Contact Our Lawyers About Property Liens And Bankruptcy
At the Sasser Law Firm, we are committed to helping individuals and families make the best use of bankruptcy law when it is appropriate and helpful.
The bankruptcy lawyers of Sasser Law have more than 20 years of experience helping people navigate and overcome financial setbacks. Contact us today to set up a free consultation about how we can assist you.
This post was originally published in August 2019 and has been updated for accuracy and comprehensiveness in August 2021
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What Debts Does Someone In Their 30s Filing Insolvency Eliminate
So, who does file bankruptcy in their 30s? Based on our data, the average 30-something filing insolvency owes more than $55,000 in non-mortgage debt.
- 88% are in trouble with credit cards
- 41% turn to high-cost payday loans for cash
- 30% are still repaying student loans
- 42% have a secured car loan or lease
- 33% owe taxes to CRA
The average monthly take-home income of a client in their 30s is $2,700. If in a 2-parent household, the average household income is $4,300. The problem is that most of their income is used for debt repayment.
How can you afford to pay for rent or a mortgage, keep up with living costs and save money if half of your income is used up to pay interest? You cant. What happens if you continue down this path is that your debt will continue to grow as you use more and more credit to balance your budget.
Check Your Credit Scores
If youve recently filed bankruptcy, chances are your credit scores are on the low side. But this doesnt mean your car loan application wont be approved. And its good to know where you stand before applying so you wont be caught off-guard when the prospective lender pulls your credit history and score.
Youll have to pay a nominal fee to access your FICO score on MyFICO.com. But you can also view your credit score by signing up for one of the . You may also be able to view your credit score on your banks online dashboard or credit card statement.
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Chapter 13 Vs Chapter 7 Bankruptcy
For many lenders, credit history and credit score are the greatest indicators of one’s financial responsibility. However, they’re not the only considerations. Lenders also consider the number of accounts included in your bankruptcy. The more accounts, the greater the bankruptcy’s impact on your credit.
Individuals can file for two kinds of bankruptcy: Chapter 7 or Chapter 13. According to , your ability to get approved for a car loan is often impacted by the type of bankruptcy you filed for and the amount of time since you filed for bankruptcy.
Filing for bankruptcy usually takes several months after your initial meeting with your lawyer. With a Chapter 13 bankruptcy, your creditors reduce the amount of money you owe. You are then responsible for making a payment to the trustee who’s in charge of your case, and they, in turn, portion out payments to the various creditors.
According to Auto Credit Express, the biggest advantage of this type of bankruptcy is that you get to retain your assets and property. This type of bankruptcy usually takes five years to complete. While a Chapter 13 stays on your credit for up to seven years, you do have options if you are trying to take out an auto loan during that time.
What Happens To My Car During Bankruptcy
Filing for bankruptcy is a serious decision that can damage your credit for seven or 10 years, depending on the type of bankruptcy. But if you’re drowning in debt you can’t pay, it can serve as a last resort to help you hit “reset” on your finances.
There are two main types of bankruptcy: Chapter 7, which liquidates some of your assets, and Chapter 13, which focuses on repaying debts. What happens to your car in bankruptcy depends both on the type of bankruptcy you file and how much equity you have in your vehicle.
Car Lenders Can Collect A Deficiency After Repossession
In most states, your car lender can come after you to collect its deficiency balance. The lender is limited to asking you to pay the deficiency without first doing more. If, however, your lender sues you in court and obtains a deficiency judgment against you, the lender can start garnishing your wages or placing liens on your other assets.