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How to File for Bankruptcy and Keep Your Car

An illustrated guide showing a person calmly filling out bankruptcy paperwork at a desk, with keys to a car placed prominently on the table, symbolizing the retention of the vehicle.

Understanding Bankruptcy and Car Ownership

Filing for bankruptcy can be a challenging process, emotionally and financially. However, understanding how to navigate the system can help retain some assets, including your car. The possibility of keeping your vehicle depends on several factors, including the type of bankruptcy filed, the state’s exemption laws, the equity in your vehicle, and whether your car loan is considered secured debt.

Chapter 7 vs. Chapter 13 Bankruptcy

In the realm of personal bankruptcy, there are two main types: Chapter 7 and Chapter 13. Chapter 7, also known as liquidation bankruptcy, involves selling off non-exempt assets to pay creditors. Chapter 13, on the other hand, focuses on reorganizing debts and creating a repayment plan that lasts three to five years. The type of bankruptcy you choose plays a significant role in whether you can keep your car.

Chapter 7 Bankruptcy and Your Car

In Chapter 7 bankruptcy, whether you can keep your car depends on the equity you have in it and your state’s exemption laws. If the equity in your car is less than your state’s exemption limit, you can typically keep your vehicle. However, if your equity exceeds the exemption limit, the bankruptcy trustee may sell your car to pay your creditors. It’s also possible to keep your car by reaffirming your car loan, which means you agree to continue making payments to avoid repossession.

Chapter 13 Bankruptcy and Your Car

Chapter 13 bankruptcy often provides a clearer path to keeping your car. This type involves creating a repayment plan that can include your car loan. If you’re behind on payments, Chapter 13 allows you to spread the arrearage over the life of the repayment plan, making it easier to catch up. Additionally, in some cases, Chapter 13 may reduce the principal balance or interest rate on your car loan, especially if the loan is older or the car is worth less than what you owe.

Exemption Laws and Equity

Each state has its own set of exemption laws that determine what you’re allowed to keep in a bankruptcy. Some states have a specific vehicle exemption that protects a certain amount of equity in your car. Additionally, there’s a federal bankruptcy exemption that you might be able to use instead of your state’s exemptions, depending on where you live. Understanding these laws is crucial to determining if you can keep your car when filing for bankruptcy.

Reaffirming Your Car Loan

Reaffirmation agreements are a tool used in both Chapter 7 and Chapter 13 bankruptcies to keep secured assets like cars. By signing a reaffirmation agreement, you and your lender agree that you will continue to make loan payments and, in return, get to keep the car. But be cautious: reaffirming a loan means it won’t be discharged in bankruptcy, leaving you liable for the debt.

Strategies for Keeping Your Car

Here are some strategies to increase your chances of keeping your car through bankruptcy:

  • Understand the exemptions: Research your state’s exemption laws to determine if your equity in the car is protected.
  • Consider filing Chapter 13: If possible, opt for Chapter 13 bankruptcy to create a manageable repayment plan that includes your car loan.
  • Consult an attorney: Bankruptcy laws are complex. Consulting with a bankruptcy attorney can provide tailored advice based on your situation and help navigate the process.
  • Stay current on your car payments: Whether in Chapter 7 or 13, staying current on car payments increases the likelihood of keeping your vehicle.
  • Explore a reaffirmation agreement: Discuss with your lender and attorney the possibility of reaffirming your car loan to retain possession of the car.

Bankruptcy doesn’t necessarily mean you’ll lose everything, including your means of transportation. By understanding the types of bankruptcy available, using exemption laws to your advantage, and maybe reaffirming your car loan, you can emerge from bankruptcy with your financial slate cleaner and your vehicle still in your possession.

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