What Happens to My Car Loan After Bankruptcy?

What type of debt is a car loan?

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The first thing to understand is that a car loan is a type of secured debt. When you get a loan to buy a piece of property, like a car or a house, the lender will want you to use that property as collateral for the loan. A debt backed by collateral is a secured debt, and it gives the lender the right to repossess your property if you stop making full payments on the loan. So, if you stop making car payments, your lender will repossess and sell your car in order to pay off your debt.

The other type of debt is unsecured debt, which is not backed by any collateral. Credit cards and personal loans are two examples of unsecured debt.

The fact that a car loan is secured debt affects what happens to the car loan after bankruptcy, because secured debts are treated differently from unsecured debts.

What happens to secured debts like a car loan after bankruptcy?

Bankruptcy eliminates your obligation to pay some of your debts, including both unsecured debts like credit cards and secured debts like car loans. But bankruptcy cannot remove a lender’s right to seize the property used as collateral for a secured debt. So, you do not have to pay your car loans if those loans are discharged after a successful bankruptcy - but stopping payments will allow your lender to take your car.

This right to repossess collateral is the major difference between unsecured debts and secured debts in bankruptcy.

Dealing with your car loan after bankruptcy

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You have three major options for your car loan after bankruptcy. First, you can stop making payments when your debt is discharged and allow the lender to repossess your car. Second, you can negotiate a new payment plan with the lender to keep ownership of your car (called reaffirmation). Third, you can offer the lender to buy out your car by paying either the remaining loan balance or the car’s actual value - an attractive option if your loan balance is more than the car is really worth (called redemption).

In general, when you stop paying your car loan, the lender will seize your car and sell it to pay off your loan. If the money from the sale is not enough to cover your remaining loan balance, the lender can sue you to collect the remaining amount (called the deficiency balance). One advantage of stopping payments on your car loan after bankruptcy is that you also have no obligation to pay any deficiency balance. The only thing the lender can do is take your car.

You may want to work out a plan to keep your car loan after bankruptcy, so that you can maintain ownership of your car. You can do this by asking the lender for a reaffirmation of your existing loan. It is possible to renegotiate your payment amounts, but reaffirmations are most commonly at the same rate as the original car loan. Once you and the lender come to an agreement, you will have to submit it to the court for approval.

There is also a way to keep your car without keeping your car loan after bankruptcy: redemption. You can offer to buy your car outright by paying your lender the actual value of the car or your remaining loan balance. Like with reaffirmation, you will have to submit your agreement with the lender to the court for approval.

The difficulty with redeeming your car is coming up with the large lump sum required to make the purchase. There are lenders which specialize in redemption funding for bankruptcies, though the loans they offer generally have high interest rates. Still, a redemption loan might make economic sense if your remaining car loan balance greatly exceeds the actual value of your car.

Conclusion: Car loans after bankruptcy

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You have options when it comes to your car loan after bankruptcy. A successful bankruptcy eliminates your car loan, but the lender will repossess and sell your car if you stop making payments on the loan. You can negotiate a reaffirmation with the lender and keep making car loan payments after bankruptcy, which allows you to keep your car. If you have the money available, you can negotiate a redemption with the lender and offer to buy your car outright.

Filing a Chapter 7 bankruptcy erases your debt and gives you the opportunity for a fresh start. Dealing with your car loan is just one part of the bankruptcy process.

If you are considering filing for bankruptcy, you can see if you qualify for assistance from Upsolve. Upsolve is a legal non-profit which helps low-income Americans file for Chapter 7 debt relief.

Upsolve is a 501(c)(3) legal aid nonprofit that started in 2016. Our mission is to help low-income Americans in financial distress get a fresh start through Chapter 7 bankruptcy at no cost. We do this by combining the power of technology with pro bono attorneys. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have mission-driven funders that include the U.S. government, former Google CEO Eric Schmidt, and private charities.

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