How Bankruptcy Affects Car Loans

April 21, 2012

How Bankruptcy Affects Car Loans

Many people considering bankruptcy have questions about how the process will affect their vehicle loans. Unlike credit card debt, medical bills and other forms of unsecured debt, which are often dischargeable in bankruptcy, car loans are usually secured debts. This means that the vehicle itself is used as collateral in the loan agreement, allowing the lender to repossess the vehicle in lieu of payment if the buyer fails to pay off the debt.

Secured loans are generally more difficult to discharge through bankruptcy than unsecured debt. Fortunately, there are a number of options for dealing with a vehicle loan during a Chapter 7 or Chapter 13 personal bankruptcy.

Chapter 7 Bankruptcy

With Chapter 7 bankruptcy, a borrower has some of his or her debts forgiven outright and may be required to surrender certain non-exempt assets. People with car loans who want to keep their vehicles when filing for Chapter 7 bankruptcy can either reaffirm the loan or redeem the vehicle.

Reaffirming a car loan during Chapter 7 bankruptcy involves signing an agreement to continue making payments on the vehicle after bankruptcy. If the borrower fails to make payments, the lender can repossess the vehicle.

To redeem a vehicle, the borrower makes a lump-sum payment to pay off the loan in the amount of its fair market retail value. Depending on the loan balance, redemption may or may not be feasible, but it can be an attractive option for those whose car loans are nearly paid off.

Chapter 13 Bankruptcy

With Chapter 13 bankruptcy, a borrower's debts are restructured and a payment plan is created. The borrow makes payments according to the plan for a period of three to five years, and the remaining unsecured debt is discharged at the end of the plan.

An auto loan will be included in the payment plan, but the exact amount depends on how recently the vehicle was purchased. Borrowers who took out a car loan within 910 days (2 1/2 years) before filing for Chapter 13 bankruptcy will be required to repay the entire remaining balance on the loan. On the other hand, for car loans more than 910 days old, the repayment amount is based on the current fair market value on the car.

People considering bankruptcy due to unmanageable debt should consult with an experienced bankruptcy lawyer to discuss their options.

Article provided by Law Offices of Phillip F. Drinkwater III
Visit us at http://www.pfdlaw.com