Bankruptcy car loans: 5 things to know


If you’re declaring bankruptcy, you know that your finances are a wreck. But that doesn’t mean you need to lose your cars to financial disaster. Here are five ways to deal with car loans when declaring bankruptcy.
If you declare Chapter 7 bankruptcy, you can continue making car loan payments through a reaffirmation agreement with the car loan lender. Lenders will insist that you make timely payments on your reaffirmed debt or they’ll have the right to repossess the car. By reaffirming the agreement, you’re essentially exempting your car loan from the bankruptcy proceedings and can keep your car.

You can always pay off the car loans in total in a Chapter 7 bankruptcy, if you have spare cash. Bankruptcy laws state you need only pay off the car’s value today, not the full debt due to the lender. You will no longer have car payments.

If you can’t pay off your debt or work out a reaffirmation under Chapter 7 bankruptcy, you can give the cars to your creditor in exchange for erasing the rest of your car loan debt.

Have you fallen behind on your car payments? A Chapter 13 bankruptcy is one way to stop your cars from being repossessed. If your car loans are less than 910 days old and you’re filing for Chapter 13 bankruptcy, you still pay the full amount due to your car loan creditor, but possibly with reduced interest.

If you are declaring Chapter 13 bankruptcy and your car loan is more than 910 days old, you may be able to “cram down” the loan, where you pay only for what the car is worth today — not what it was when you bought it. The car loan’s value in current terms is called “fair market value.”

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