Automobile Debt

Debt from car loans, often where the car is worth much less than
what is owed, can be discharged entirely under Bankruptcy Law.

Bankruptcy Options for Automobiles

Various options exist for automobiles under Bankruptcy Law, including surrendering the car and walking away from the debt, or keeping a car through a bankruptcy.

Bankruptcy and Automobiles

Filing either Chapter 7 or Chapter 13 Bankruptcy puts a halt to all collection proceedings from debtors - including any attempts to repossess a car.

This allows time for the filer to determine which type of bankruptcy will be filed, to get the necessary paperwork in order, and for the bankruptcy court to approve the process.

But since cars are secured loans, filing bankruptcy won't stop repossession for longer than a couple of months. While it's true that one can use bankruptcy to discharge the debt, the bank still has the right to repossess the automobile if payments are behind.

Surrendering a Car and Walking Away

Usually, a car is worth less than what is owed on the loan. After all, the car has depreciated in value, but the loan was made when the car was brand new, with interest added as well.

Those filing either Chapter 7 or Chapter 13 have options for surrendering their cars and walking away from their car loans if desired. In the case of Chapter 7 bankruptcy, the car is surrendered and the remaining debt is completely discharged or forgiven. With Chapter 13, the car is surrendered and a portion of the debt could be repayed under the terms of the bankruptcy plan.

Keeping a Car Through Bankruptcy

It's entirely possible to keep a car after filing bankruptcy.

With Chapter 13 Bankruptcy, property is kept, including cars. Any back payments are added to the bankruptcy repayment plan, which are spread out over 3 or 5 years.

With Chapter 7 Bankruptcy, two options exist. The first, "redemption", involves buying the car back from the creditor at its current value, in one lump sum. The second option involves signing a new contract with the bank to "reaffirm" the debt, whereby the loan debt is restored under the same terms as before.

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