Keeping your car in bankruptcy

Over the past few years I’m sure you have heard or even know people that have pursued bankruptcy to ease the financial burden of an underwater mortgage (owing more on a mortgage than it is actually worth). According to, 1 in every 586 housing units in Ohio received a foreclosure filing in October 2011.

A similar question that is becoming more and more common is whether or not people can use bankruptcy as a release for the financial burden of an underwater auto loan. While each situation is considered unique and therefore could provide different outcomes, if you are facing an underwater car loan there are a few potential bankruptcy options that you can explore with your bankruptcy attorney.

Chapter 7 bankruptcies provide several options for debt relief, including some that may allow you to keep your car. As always, your options will depend on your specific situation.

  • Surrender the vehicle. While it may not be plausible for you, surrendering your car is an option to reduce the burden of auto payments and insurance. Whether you should continue to pay the auto loan in the meantime depends on your specific situation. However, it is important to keep the vehicle insured for as long as you have it.
  • Reaffirm the loan. A reaffirmation of your auto loan is a binding contract indicating that you are accepting responsibility for the entire or partial loan balance. If you pursue  this option you would likely be required to sign an enforceable agreement in order to retain possession of your car. A reaffirmation is not always an option, depending on the status of the loan when you file for bankruptcy and your specific financial situation.
  • Keep the car and continue making payments. If you are current on your car loan and your lender does not require a signed reaffirmation agreement, you can explore the option of continuing payments and possession of the car.
  • Redeem the loan. Through judicial approval you may be able to reduce your car debt to the fair market value. In other words, if your loan balance is $8,000 and your car is only worth $4,000 you may be able to reduce the balance of the loan by $4,000. Depending on your situation, your payment requirements may range from monthly payments to a lump sum payment. There’s often a tradeoff, however, in higher interest charges, so it’s important to run the numbers to see if a redemption will help you.
  • Negotiate with the lender. Not a common solution, but negotiating directly with the lender to lower the balance to the fair market value is a possibility.

In Chapter 13 bankruptcies, your options are different. You may choose to keep the car and have it rolled into your bankruptcy, where you’ll pay some portion–often a fraction–of the balance as part of your payment plan. If you’ve owned your car for more than two and a half years, you may qualify to have your outstanding balance adjusted to Fair Market Value and stretch the payments out over the life of the bankruptcy. In some cases, you may be able to keep your car and pay off your debt for a very modest monthly payment.

As you can tell, there are many choices in bankruptcy when it comes to your auto loan. If you want to keep your car, it’s important to get expert advice. If you are exploring the possibility of filing for bankruptcy, schedule a free consultation to learn about your options with a Columbus Bankruptcy Attorney, by calling 614-934-1544 or contact us today.