If you are like most debtors filing for bankruptcy, you are behind on your rent, credit card bills and car payments. You also rely on your car to go to work, and the loss of your car would be devastating to your already precarious financial circumstances. Bankruptcy can be your opportunity to avoid repossession of your car and help you restore your credit rating.
Reaffirming the Loan
If you still owe on your car loan and want to keep the car, you will need to either redeem it or try to reaffirm the loan. To redeem the vehicle, you will need to pay off the loan in full. However, since you are bankrupt and likely cannot pay the remaining balance, you may need to attempt to reaffirm your obligation to repay the car loan. If you reaffirm your car loan, you are obligated to make payments until it is paid in full. If you miss a payment the lender may repossess the car and sue you for any unrecovered debt.
Bankruptcy law does not require you to reaffirm the loan in order to keep the vehicle; it only requires that you attempt to reaffirm the debt. Your vehicle lender may propose a loan reaffirmation, subject to court approval, when you file your bankruptcy petition. If the court determines the reaffirmation agreement poses an undue hardship for you, the judge will require the lender's lawyer to announce whether they will repossess the car, even if you are current on your car payment, if you do not sign the reaffirmation contract. If the lender confesses that they will not repossess your vehicle, you may avoid reaffirming the loan and keep your car so long as you keep current on your payments. However, if you avoid reaffirmation the lender may not report your payments to the credit bureaus, thereby denying you the benefit of rebuilding your credit for your repayment efforts.
Chapter 7 Bankruptcy
Under Chapter 7, any of your assets that are not protected by exemptions under bankruptcy law are sold by a court-appointed trustee to pay your creditors. You may be able to save your car from liquidation by applying an exemption to any equity you may have in it. If you own the car and are not able to apply an exemption covering the total value of the vehicle, the trustee will take the car and sell it at auction. The trustee will then provide you a check for the value of the exempt portion of the car's value.
Chapter 13 Bankruptcy
If you earn too much money to qualify for Chapter 7, you may still seek protection from your lenders under Chapter 13 of the bankruptcy code. Under Chapter 13, you are put on a three-year or five-year repayment plan wherein you pay your disposable income to the bankruptcy trustee to disburse to your creditors. If your car is worth less than what you owe the lender, you may be able to obtain an order from the bankruptcy court reducing the outstanding balance to the car's current value and restructure the loan to a lower interest rate. Some states require that car payments be included as part of the Chapter 13 payment plan, while others treat car payments as one of the necessary living expenses that are deducted from your income calculation before your disposable income is determined. If you pay your car loan directly to your creditors outside of the repayment plan, you avoid the trustee's taking 10 percent of your payment as commission.
If you filed a Chapter 7 bankruptcy, your creditors stop reporting negative information on your accounts to the three credit reporting agencies at the time you receive your discharge, which is usually a few months after the case is filed. However, your credit may suffer longer if you filed a Chapter 13 bankruptcy since some creditors may continue to report your account as past-due during your repayment period. Since the Chapter 13 repayment plan may last as long as five years, your credit may suffer far longer than if you filed under Chapter 7. Although recent court rulings now require creditors to stop negative reporting at the time you file your Chapter 13 plan, not all creditors are complying with these new rules. As a result you may need to resort to litigation against your creditors and the credit agencies under the Fair Credit Reporting Act in order to clean up your credit report.