Financial difficulties can strike anyone, and when you find yourself facing bankruptcy, it’s natural to have many concerns, including how it will affect your assets, like your car. In this article, we’ll explore the intricacies of bankruptcy and cars, shedding light on various aspects you should be aware of to make informed decisions during this challenging time.

Bankruptcy Basics

Bankruptcy is a legal process designed to help individuals and businesses manage overwhelming debt. It allows them to eliminate or restructure their debts while ensuring a fair distribution of assets among creditors. There are different types of bankruptcy, but the two most common for individuals are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

This type of bankruptcy can discharge unsecured debts, such as credit card debt, unsecured bank loans, and/or medical bills, but it may also involve the sale of assets, including your car if it’s not protected by exemptions. Although it is possible for a debtor to lose an asset, like a car, in a chapter 7 bankruptcy, it is an extremely rare occurrence for that happen. The reason is that the relevant bankruptcy exemptions usually fully exempt the car equity (difference between the trade-in value of the car and the amount of the car loan, if any).

Chapter 13 Bankruptcy

In a chapter 13 case, the debtor cannot lose any assets and they will have a monthly payment plan for 36-60 months, depending on why they are in the chapter 13. The normal debtor in a chapter 13 is not required to repay all of their debts in a chapter 13. The lowest that a monthly plan payment can be in a chapter 13 is $100, but potentially can be higher based on different reasons. In a chapter 13 case there is no chance of losing your car, or any other assets. It is up to the debtor (the person that files the chapter 13) to decide if they want to keep the car or surrender it. In Chapter 13, you may be able to retain your assets, including your car, as long as you stick to your repayment plan.

Protecting Your Car in Bankruptcy

Whether you can keep your car in bankruptcy largely depends on the bankruptcy type, the value of your car, and the exemptions available to you. Here’s how it works:

  1. Car Equity: In Chapter 7 bankruptcy, the trustee may sell your car to repay your creditors if it has significant equity beyond the exemption limit. Equity is the value of your car minus any outstanding loans or liens. However, in Chapter 13, you can usually keep your car even if you have non-exempt equity in it.
  2. Exemptions: Bankruptcy law allows you to exempt certain property, protecting it from being sold to repay your debts. The amount you can exempt varies by state, and you can typically choose between federal and state exemptions. Many states offer exemptions specifically for vehicles, ensuring you can keep your car within limits.
  3. In Chapter 13, your car payments are often included in your overall repayment plan, making it more manageable to catch up on any missed payments or arrears. Sometimes it is possible to reduce the interest on car loans in a chapter 13. Also, sometimes it is possible to reduce the principal that needs to get paid on a car loan through a chapter 13 case.
  4. In a chapter 7 case, you’ll need to decide whether to reaffirm the loan, redeem the car, or surrender it.

Reaffirmation, Redemption, or Surrender

During a chapter 7 bankruptcy, you have three primary options when it comes to your car:

  1. Reaffirmation: You can choose to reaffirm your car loan, which means you’ll continue making payments as agreed upon in the original loan contract. This allows you to keep your car, but it also means you’re still liable for the debt if you ever default in the future.
  2. Redemption: You can opt for redemption by paying a lump sum to the creditor equal to the car’s current fair market value. This can be a good choice if your car is worth less than the loan balance, as it reduces the debt significantly. There are lenders that specialize in bankruptcy redemption loans.
  3. Surrender: If you can’t afford your car or it’s no longer worth keeping, you can surrender it during bankruptcy. This eliminates the car loan and any associated debt.

Conclusion

Bankruptcy can be a daunting process, but understanding the implications for your car is essential for making informed decisions. Your ability to keep your car largely depends on the type of bankruptcy, the value of your vehicle, and the exemptions available to you. Consulting with an experienced bankruptcy attorney in Portland, Oregon, or the area where you live, can provide personalized guidance and help you navigate this complex terrain to make the best choices for your financial future. Remember that bankruptcy is not the end, but rather a fresh start on the path to financial recovery. I have been practicing law since May 1998 and have been exclusively practicing bankruptcy law since the summer of 2009. I offer free bankruptcy consultations to individuals that live in Oregon in-office, phone, or Zoom.