How to File Bankruptcy and Keep Your Car

As difficult as it is to face filing for bankruptcy, ruining a credit score, and damaging a debtor’s reputation, it can make the entire situation more difficult if their car is repossessed in the process. That can make it hard to maintain a job that will put the debtor back on their feet, or look for a job if they’ve already been laid off. There are ways to protect a car in a bankruptcy filing, however, if the filer and their attorney understand how to take advantage of all the benefits.

Which Type of Bankruptcy

Those who are filing for chapter 13 bankruptcy generally don’t need to worry about protecting their car during that process. This type of bankruptcy protection requires a debtor to develop a plan for repaying most of their debt, which will allow them to keep their property in the end. Only if they fail to maintain the scheduled repayment plan do they need to worry about their creditor repossessing the vehicle.

Those who qualify for chapter 7 bankruptcy may have a more difficult time protecting their car. Chapter 7 is known as a form of liquidation, in that some debtors with significant amounts of property may have to sell some of it to pay off their creditors, depending on the types and amounts of property exemptions their state allows.

Chapter 7 and Your Vehicle

There are several possible outcomes for a vehicle under chapter 7 bankruptcy. Some are to the debtor’s advantage, and some are not so clear-cut.

Surrender the car. This should be expressed in the bankruptcy forms as well as in a written communication to the lender. Those who choose this option lose their car, but the remaining debt is erased when the bankruptcy is discharged. This is often a good option for those with an expensive car and little equity.
Continue making payments. If the lender allows this option, called a ride-through, and the debtor defaults on the loan, they will lose their car but not be required to make up the difference between the value of the car and the remaining debt.
If the lender will not allow the debtor to maintain a ride-through agreement, they must negotiate a reaffirmation agreement. The parties may renegotiate the terms of the loan, and in fact, it is a good time to attempt to do so. The lender knows that they will lose money by repossessing the car. If the reaffirmation is agreed upon, the debtor is now responsible for the full amount of the loan. If they default, they will lose the car and be required to make up any deficiency amount.

The court must review all agreements made in a chapter 7 bankruptcy. If they disapprove a reaffirmation agreement, the debtor may treat the car loan as a ride-through as long as they continue to make their payments. If they are required to default on that loan in the future, they will not be responsible for a deficiency between the value of the car at that time and the remaining debt owed.

Getting Legal Help to Keep a Car during Bankruptcy

There are some complex options open to a debtor when they file for chapter 7 bankruptcy. Since every debtor is different and every credit relationship is unique, it may take a bankruptcy attorney to guide them through the decision-making process. If a debtor does decide to reaffirm their car loan, their attorney can then use their negotiating skills to realize a more appropriate repayment schedule.

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