Can you keep your car after a bankruptcy?

Filing for bankruptcy is not an easy decision and can damage your credit report for up to 10 years, depending on what type of bankruptcy you file. However, if you are drowning in debt and aren’t able to pay, bankruptcy can serve as the last option and allow you to reset your finances. There are two different types of bankruptcy and the type of bankruptcy you file and how much equity you have in your car will determine if you are allowed to keep your vehicle.

Factors That Determine if You Can Keep Your Car after You File

There are different factors that go into this determination and working with experienced lawyers, such as Adam Law Group, can help make the process easier and make sure you have all your options explained to you. Your vehicle is considered an asset and it potentially has some value so it’s something that creditors may want to pursue when it comes to collecting the debt.

It is possible that your vehicle may be considered under an exception that will protect it from repossession. There are four factors that will determine if you are able to keep the vehicle. These include the type of bankruptcy you are filing, whether you lease, own, or are still paying off the vehicle, the current value of your vehicle, and the exemptions that apply where you currently live.

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What Happens if You File Chapter 7 Bankruptcy?

When you file for Chapter 7 bankruptcy, it can clear up some of your unsecured debts but then this also means that you are required to give up or sell some of your assets in order to pay debts. The items that are going to be exempt are going to vary. If you have an exemption then you are allowed to keep the vehicle if you are current on the payments.

The market value of your car you already own will need to be less than the exemption amount. If you want to determine how much equity you have in your car then subtract the current loan balance from the current value. Keep in mind that vehicles usually depreciate in value fast so you likely may not have equity unless you are already close to the end of your loan term.

If you owe as much as your car is worth then you aren’t going to have any equity in the car. If the vehicle is worth less than what you currently owe then this is considered negative equity.  If you currently own your car and aren’t making any payments on a car loan then the equity you have in your vehicle is going to be the same as your vehicle’s value. For example, if your car is worth $3,000, then your equity is going to also be $3,000.

If you calculate the equity and it exceeds the exemption limit then there are some different things that can happen. The trustee who is managing your case can sell the vehicle, give you the exempted amount and then use the rest to repay your creditors. It’s possible that you may have the option to pay off the equity at a discount in order for you to keep your car.

If you are behind on your loan payments then the lender is able to repossess the car. You aren’t going to be protected from the exemption if the loan is delinquent. In this case, you can keep the vehicle if you pay off the remainder of the loan in one lump sum and get back in good standing. There is also the option to surrender your car back to the lender. This removes your liability from the auto loan. However, this means you won’t have your vehicle. This also has the same consequences to your credit as repossession does.

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What Happens if You File Chapter 13 Bankruptcy?

With Chapter 13 bankruptcy, you aren’t liquidating your assets in order to repay your creditors and instead you enter a debt repayment plan. With this form of bankruptcy, your property isn’t sold off and your finances are instead reorganized. If you currently own your car then you are able to keep it.

With Chapter 13 bankruptcy, your repayment period is three or five years. Once this period ends than some debts are going to be discharged and you won’t have to pay them anymore. Certain debts can’t be discharged, such as student loans and mortgages. Debt is going to be grouped into three different categories. Car loans are considered secured debt.

If you currently have a car loan then it’s possible that the amount you owe on it could be reduced in the process if you currently owe more than the car’s value. If you do qualify for a repayment plan and are able to get caught up on the loan then you are able to keep your car. However, if you aren’t able to catch up on your loan or aren’t able to afford payments on the car then you can surrender the car to get out of payments, but this will have some credit consequences.