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What Happens to Your Car in a Bankruptcy?

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Most people who file for bankruptcy and own a car are allowed to keep it during and after their bankruptcy case.  When filing for bankruptcy, be it Chapter 7 or Chapter 13, there are some choices you can make when it comes to your vehicle. Chapter 7 and Chapter 13 are different when it comes to these choices (for more information on the difference between Chapter 7 and Chapter 13, click here).  


Chapter 7 Bankruptcy 


Under Chapter 7 Bankruptcy, you will need to decide what you want to do with your vehicle. If it is paid for, then you will be able to keep it as long as it’s value is below the state’s vehicle exemption amount.  If you are behind on payments, Chapter 7 will stop any Repossession and allow you to reaffirm the debt.  This will allow you to keep your car. 


To keep the car by reaffirming the car loan, you will need to sign a Reaffirmation Agreement which is a new contract for car payments. You and the lender can agree to change the current payment terms or leave them as they are. The bankruptcy court must approve this Reaffirmation Agreement. However, Reaffirmation Agreements are not necessary if you are up to date on your payments. 


Another option is to surrender the car to the lender and walk away from that debt.  If you choose this route, you list the lender on your bankruptcy statement and check the box that indicated you intend to surrender the vehicle. The deficiency balance will be debt discharged in the bankruptcy.  


Chapter 13 Bankruptcy 


Chapter 13  allows you to make up the debt you owe on car loans through your bankruptcy plan. Chapter 13 can prevent your car from being repossessed. If you bought your car within 910 days of filing for Chapter 13 bankruptcy, then you must repay the entire car loan. But your interest rate can be significantly reduced. And if you bought the car longer than 910 days prior to filing, you will only owe what the vehicle is worth. And if you own your car outright, you will not lose it in Chapter 13 Bankruptcy.   


For car leases, you will need to decide whether you want to return the vehicle or continue making the same payments as before. Leases cannot be repaid through bankruptcy repayment plans. If you return to the leaser, they will sell the car and file a Chapter 13 bankruptcy case for the lease deficiency. It will end up being a non-priority claim and you will only have to pay a small portion of it back. 


If you have specific questions on your vehicle and bankruptcy, you can schedule a complimentary consultation online or call 1-925-264-9083. 


With almost 10 years of professional experience, bankruptcy law attorney, Alia Khan, has helped individuals and small businesses in the East Bay region exercise their rights to obtain bankruptcy protection.