Living in Greenville, NC, a car is pretty much a necessity. You’re constantly using it for work, errands, and getting the kids around. So, it’s completely understandable to feel anxious about losing your car when you’re considering bankruptcy.
While every bankruptcy case is different, and there isn’t a single answer for everyone, there’s often a way to keep your car. This guide will provide straightforward explanations, free of legal jargon, so you can make confident decisions about your finances and your vehicle.
What Is Bankruptcy and Why Do People File for It?
Let’s talk about what bankruptcy is. Think of it as a chance to hit the reset button when debt gets overwhelming. While it’s a really big decision and not something anyone looks forward to, sometimes it’s the most helpful way to get back on your feet.
Why do people file for bankruptcy? Sometimes, life hits you hard with things like big medical emergencies, job loss, or getting stuck with high-interest debt. Bankruptcy gives you a legal way to get rid of some or all of your debt, or set up a plan to pay it back over time.
If you’re filing as an individual, you’ll see two main types: Chapter 7 and Chapter 13. Each works differently, especially when it comes to things you own, like your car.
What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Chapter 7 essentially wipes the slate clean, eliminating debts like credit cards and medical bills. However, the court might sell some of your non-exempt assets, which could include your car if it’s considered valuable.
With Chapter 13, you’ll develop a plan to pay back your debts over a few years.This can be good if you’re behind on car payments, because it gives you time to catch up without losing your car.
The type of bankruptcy you choose (or can use) really changes what happens to your car. So, it’s important to understand the difference. More details about the differences can be found in here.
What Happens to Your Car During Bankruptcy?
When you file for bankruptcy, all your possessions, including your car, become part of the court case. That doesn’t automatically mean you’ll lose it. What happens to your car depends on a few things:
- What kind of bankruptcy you file (Chapter 7 or 13)
- How much your car is worth
- If you still owe money on it
- The rules in your state about keeping your car
With Chapter 7, the court might sell some of your things to pay your debts. But if your car isn’t worth much, or you still owe a lot on it, you’ll likely keep it. With Chapter 13, you usually get to keep your car, as long as you put it in your repayment plan.
Will I Lose My Car If I File for Chapter 7 Bankruptcy?
That depends on a few things:
- The value of your car
- If you still owe money on it
- Your state’s rules about cars in bankruptcy.
You’ll likely keep your car if it’s worth less than you owe, or isn’t worth much, and you’re making your payments on time. If you own a valuable car, the court might sell it. However, you have options to keep it, such as using a special exemption or setting up a payment plan with the court’s representative. Each case is unique, but most people in Chapter 7 cases find they get to keep their car.
How Do Bankruptcy Exemptions Work to Help You Keep Your Car?
When you file for bankruptcy, there are rules called ‘exemptions’ that help protect things you need like your house, clothes, and your car. Depending on the state, you’ll either use federal rules or those specific to that state. These rules tell you how much of your car’s value you can keep, which means if your car is worth less than what you owe or isn’t worth much, it’s safe.
Here’s an example: if your car is worth $5,000, and your state lets you keep $6,000, you’re good to go. Even if your car’s value exceeds that, you might still keep it by paying the difference.
What If I Have a Car Loan—Can I Still Keep the Car?
There are a few ways to handle this: you could keep up with payments, promising to continue paying after bankruptcy if you’re current. Another option is to pay the car’s current value, not the full loan, which is helpful if it’s depreciated. Or, lastly, you can return the car and eliminate the loan if it’s not worth keeping. Ultimately, if you can afford to keep paying and the people you owe agree, you can keep your car.
What If I Own the Car Outright—What Then?
Having a car you own completely might sound great, but in bankruptcy, it can be tricky. The court will look at how much your car is worth and compare it to your state’s rules.
If your car’s value is less than the amount you can keep, you’re fine. But if it’s worth more, the court might sell it, give you the allowed amount in cash, and use the rest to pay back what you owe.
To avoid any surprises, find out how much your car is really worth before you file. Websites like Kelley Blue Book can help. You might even think about selling your car and buying a cheaper one that fits under the rules before you file.
What Are My Options for Keeping a Car in Bankruptcy?
Here’s some good news. You have choices when it comes to your car in bankruptcy:
- Use the Rules to Protect Your Car. You can use the state rules (exemptions) to keep the value of your car safe.
- Keep Your Loan Going. If you’re paying on time and like your current payments, you can promise to keep paying.
- Pay the Car’s Real Value. You can pay what the car is really worth right now, which is good if you owe more than it’s worth.
- Give the Car Back and Forget the Loan. You can return the car and get rid of the loan if it’s too expensive or not worth keeping.
- Make a Payment Plan. You can switch to Chapter 13 if you need more time to catch up on late car payments.
Each option has its good and bad points, and the best one depends on what you need, how much you earn, and what your car is worth.
Should I Reaffirm My Car Loan or Redeem the Vehicle?
This is a big decision, so let’s break it down:
- If you keep your loan (reaffirm), you keep making your monthly payments. But if you miss payments later, the lender can still take your car back.
- If you pay the car’s worth right now (redeem), you pay one big lump sum, even if you owe more. This is good if your car isn’t worth as much as you owe, and you have the cash or can get a loan.
You can keep your car either way, but it’s important to be realistic about your money. Can you actually afford the payments? And do you really want to keep this car? These are important questions to ask yourself.
How Will Bankruptcy Affect My Credit and Car Loans in the Future?
Let’s be honest, bankruptcy will affect your credit score for a while. It’ll stay on your report for 7 to 10 years, depending on how you file. But here’s the good news: getting a car loan is still possible.
Many people can get a car loan within a year of filing. The interest rates might be higher at first, but if you’re good about paying on time and keeping your credit clean, you can rebuild your credit score and get a better loan down the line.
What Should I Do Before Filing to Protect My Car?
Here are some smart moves to make before you file for bankruptcy:
- Know Your Car’s Value and Loan. Figure out how much your car is worth and how much you still owe on it.
- Check Your State’s Car Rules. Find out what your state’s rules are about keeping your car in bankruptcy.
- Decide How to Deal with Your Car. Decide if you want to keep your car, keep paying your loan, pay the car’s worth right now, or give it back.
- Catch Up on Car Payments. If you can, pay any late car loan payments.
Taking these steps before you file will improve your chances of keeping your car.
Should I Talk to a Bankruptcy Lawyer About My Vehicle?
Yes, it’s a good idea to talk to a lawyer. Bankruptcy can be confusing, and a good lawyer can help you understand all your choices. They’ll help you understand your rights, use the right rules to protect your possessions, and keep you from making mistakes that could cost you your car.
They’ll also help you decide if Chapter 7 or Chapter 13 is the best option, and how to handle any car loan or car value problems. It’ll provide you with peace of mind and ease the process.
Conclusion: How to Move Forward with Your Car After Bankruptcy
Filing for bankruptcy is a serious step, but you don’t have to lose your car. Good planning and a lawyer’s support will help you to keep your car and get your finances back in shape.
Bankruptcy is a chance to rebuild your financial life. It’s not the end of the road, but the start of a better one.