Will My Car Loan Be Discharged in Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a quick process that typically lasts about 4-6 months. But what happens if you have a car loan when you file for Chapter 7?
- Option 1: Keep the Vehicle
If you want to keep your car, you will need to continue making payments on the car loan. In some cases, you may be asked to sign a reaffirmation agreement, which means you agree to remain personally liable for the loan even after your bankruptcy case is discharged.- If you sign the reaffirmation agreement but fail to make payments, the lender can repossess the car and pursue you for any remaining balance after selling the vehicle at auction.
Option 2: Surrender the Car
If keeping the car isn’t an option for you, you can surrender the vehicle. In this case, the debt tied to the car loan will be discharged, meaning you will no longer owe the remaining balance. However, the lender will repossess the car, and you will lose possession of the vehicle.
What Happens If My Car Gets Repossessed?
If your car is repossessed during or after your bankruptcy case, the discharged debt means you won’t be responsible for paying the remaining balance, assuming you didn’t sign a reaffirmation agreement.
If you don’t want to keep the car, Chapter 7 can help eliminate the loan, but it also comes with the risk of losing the vehicle.
How Car Loans Are Treated in Chapter 13 Bankruptcy
Will My Car Loan Be Discharged in Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a reorganization plan where you make monthly payments to a trustee over 3 to 5 years to repay a portion of your debts. In Chapter 13, you have more flexibility with car loans:
- Option 1: Keep the Vehicle and Continue Payments
If you want to keep your car, you will need to continue making payments through your bankruptcy repayment plan. This option is ideal if you want to retain possession of the vehicle while reorganizing your debts. - Option 2: Surrender the Vehicle
If you decide you can no longer afford the vehicle, Chapter 13 allows you to surrender the car without facing a deficiency balance (the difference between what you owe and the vehicle’s value at auction). You will not be personally liable for any remaining debt after the vehicle is sold.
Car Loan and “Cramdown” Option in Chapter 13
In some cases, if you owe more on the vehicle than it’s worth, Chapter 13 allows for a “cramdown” of the loan. This means the loan amount can be reduced to the current market value of the vehicle, and you would only pay that reduced amount over the course of your repayment plan. This is an option for car loans that originated over 910 days before your bankruptcy case is filed.
What Should You Do If You Have a Car Loan in Bankruptcy?
As you’re considering bankruptcy, it’s important to review your car loan situation closely:
- Is your car loan affordable?
- Do you want to keep your car or are you willing to let it go?
- Are you upside down on your car loan (owing more than the car is worth)?
Chapter 7 and Chapter 13 bankruptcy both offer options for dealing with car loans, but the right choice depends on your financial situation and long-term goals.
Questions to Consider Before Filing for Bankruptcy
- Are you struggling to keep up with car loan payments and other debts?
- Do you want to keep your car, or is it time to let go of a vehicle you can’t afford?
- Are you considering Chapter 7 or Chapter 13 bankruptcy, and which one is right for your car loan situation?
Take the First Step Toward Financial Freedom
If you’re overwhelmed by car loan debt and other financial challenges, bankruptcy could be the solution you’re looking for. Understanding how bankruptcy affects your car loan is key to making the right decision for your future.
Contact our Kansas City bankruptcy attorneys today for a free consultation. We can help you understand how bankruptcy will impact your car loan and whether Chapter 7 or Chapter 13 is the best option for you. You don’t have to navigate this process alone—we’re here to help you get the fresh start you deserve.
Get in touch now to schedule your free consultation and learn more about how bankruptcy can help you manage your car loan debt. Let’s find the right path for your financial future!
