What Happens to My Car Loans in a Bankruptcy?

Anyone who is considering bankruptcy will likely be concerned about its effect it will have on car loans, since such loans are considered secured loans, with the vehicle as collateral.  Most states have bankruptcy exemptions that allow you to keep your vehicle, but the amounts vary from state to state.  So how do you know what will happen to your car before you make the choice to file?

Regardless of whether you file Chapter 7 bankruptcy or Chapter 13 bankruptcy, there will be an “automatic stay” that applies and prevents debt collection attempts, lawsuits, foreclosures, wage garnishments and repossessions until the court determines the outcome of your bankruptcy filing.  How the courts will handle your car loan depends on the type of bankruptcy you file. 

If you file Chapter 7 bankruptcy, your car loan will be considered secured debt and you essentially have two options.  You can reaffirm it, which means you will continue making payments as normal.  Same interest rate, same payments, same time. Or, you can surrender it, which means you give the car back and have the remainder of the amount owed on the car (after the car is sold through auction) discharged through the bankruptcy filing.  

If you file Chapter 13 bankruptcy and your car is a newer car (meaning you bought it within 910 days of the date in which you filed bankruptcy), you are required to pay the amount of the loan, although it might be possible to get your interest rate reduced.  If your car is an older car (meaning you purchased it more than 910 days before filing for bankruptcy), you will only be required to pay the car’s current market value.  This is a useful tool for people who had bad credit and consequently have been paying for years at an obscene interest rate.