What Happens to Your Car Loan When You File for Bankruptcy?
Filing for bankruptcy can be a heavy-impact decision, and if you have a car loan, you may wonder what options are available to you. The good news? Depending on the type of bankruptcy you file, there may be a clear path to address your car loan. This article explains how car loans are handled during bankruptcy and the factors to consider when deciding what's best for your situation.
Chapter 7 Bankruptcy and Car Loans
Chapter 7 bankruptcy focuses on asset liquidation to discharge debts. If you're filing under Chapter 7, there are three main ways to handle your car loan:
- Surrender the Vehicle: If keeping the car isn't financially viable, surrendering it allows you to give it up and eliminate the car loan debt.
- Redeem the Vehicle: If you want to keep the car, you can pay a lump sum equal to the car's current market value, even if it's less than what you owe on the loan.
- Reaffirm the Loan: You may choose to reaffirm the loan, meaning you agree to continue making payments under the same terms. This allows you to keep the car but doesn't discharge the debt.
Chapter 13 Bankruptcy and Car Loans
Chapter 13 bankruptcy operates differently, focusing on restructuring debts through a repayment plan. Under this plan:
- Repaying Through the Plan: You can keep your vehicle and include the car loan in your repayment plan. This spreads out payments over 3 to 5 years and may allow you to negotiate lower interest rates or even reduce the amount owed if your car's market value is less than the loan balance (known as a "cramdown").
Factors to Consider
Before deciding how to move forward, it's crucial to evaluate:
- Loan Balance vs. Car Value: Is your car worth less than what you owe? This can impact whether surrendering or redeeming is a better option.
- Interest Rates: Chapter 13 allows for the potential to negotiate lower interest rates, which can save you money long-term.
Work with Bankruptcy Attorneys in Los Angeles
You don't have to navigate a potentially overwhelming process of bankruptcy alone. At RHM LAW LLP in Los Angeles, we specialize in helping individuals resolve financial struggles and regain stability. Contact us today at (213) 344-0043 to schedule your free consultation with one of our top-rated bankruptcy attorneys.