For most people filing Chapter 7 bankruptcy, bankruptcy will affect the car loan. However, if you want to keep your car, you most likely can. You can continue making your payments under the lease or loan.
What happens to a car loan during bankruptcy can seem complicated, but understanding how the loan is structured can make it easier to understand.
How a Car Loan Works
When you purchase a vehicle, you sign two documents: a promissory note and a lien for the title.
The promissory note is your agreement with the lender that you will personally repay the debt for the vehicle. The lien on the title provides security to the lender to help ensure that the loan is repaid.
When you file bankruptcy and receive a discharge, you no longer have a personal obligation under the promissory note to pay for the vehicle. However, the lien on the title remains.
This means that if you surrender the vehicle to the creditor, the creditor can take the vehicle back but cannot ask you to pay the remainder of the loan.
This can be a useful option for someone who is upside down on a vehicle or who previously rolled negative equity into the purchase of the current vehicle.
What Happens to a Car Loan in Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy can allow you to force your lender to reduce your interest rate or reduce the principal you owe on your vehicle.
You may have the option to keep the vehicle with the lower payment. If you want to obtain a new vehicle instead, you can surrender your current vehicle to the creditor and obtain a new car and loan.
Many people filing Chapter 13 take advantage of restructuring their vehicle payments and interest rates. This can make their vehicles more affordable and free up income each month by lowering their payments.
Can You Keep Your Car After Filing Bankruptcy?
If you want to keep your vehicle, most people are able to do so whether they file Chapter 7 or Chapter 13 bankruptcy.
Our team can evaluate your options and help you make the best decision for you and your family.
If you have questions about this topic or any bankruptcy law matter, call Bononi & Company at 724-832-2499.