When facing bankruptcy, you might want to keep your car — even if you are currently paying a car loan each month. The goal of bankruptcy is to help someone get out of debt enough to regain a financial foothold on life. For many people, keeping a working and reliable vehicle is required to maintain financial stability because the vehicle might be required to get to and from work or even perform work.
You can keep a vehicle during either Chapter 7 or 13 bankruptcy proceedings. In a Chapter 13 bankruptcy, and individual usually makes arrangements to restructure debt. That means debt — including vehicle loans — is still paid. The age of the vehicle loan determines how it can be restructured in a Chapter 13 bankruptcy. Vehicle loans that were taken out less than 910 days before the bankruptcy must be paid in full. For older vehicles, courts usually create a prorated payment plan that is based on the value of vehicle.
According to Bankrate, individuals have three options for dealing with auto loans and vehicles under Chapter 7 bankruptcy proceedings. The first option is to surrender the car in the bankruptcy. The vehicle is returned to the lender as consideration for the debt owed.
To keep the car during Chapter 7 bankruptcy, individuals either redeem the vehicle or reaffirm the debt. Redeeming the vehicle means paying off the entire loan in one payment. It is not a common action for those entering Chapter 7 bankruptcy, but it does happen. Reaffirming the debt means promising to pay the vehicle loan as owed. Reaffirming debt can help those in bankruptcy build positive credit if they are able to make the payments.
Understanding your options for keeping property in bankruptcy is important. Evaluating all legal and financial options lets you make choices that are positive for your future.
Source: Bankrate, “Keeping your auto: car loans in bankruptcy,” Margarette Burnette, accessed Aug. 07, 2015