If you’re struggling with debt, bankruptcy can provide a path to financial relief. One question that many people have when considering bankruptcy is whether they can discharge their car loans. Cars are essential for daily life, and losing one could have serious consequences. Understanding your options and how bankruptcy might affect your vehicle can help you make an informed decision. Read this blog and reach out to a seasoned Newburgh bankruptcy lawyer from our legal team to learn what happens to car loans when filing for bankruptcy and how our legal team can assist you. Here are some of the questions you may have:
What Happens to Car Loans in Bankruptcy?
When you file for bankruptcy, your car loan is treated as a secured debt. What does that mean? A secured debt is one where the lender has collateral — in this case, your car. If you fail to make payments, the lender has the right to repossess the vehicle. In both Chapter 7 and Chapter 13 bankruptcy cases, you have options for dealing with car loans, but these options vary significantly.
Under Chapter 7 bankruptcy, which is also known as “liquidation” bankruptcy, you may discharge your personal obligation to pay the car loan. However, there’s a catch. While the debt may be discharged, the lender still holds a lien on your car. As a result, if you don’t continue making payments, the lender may repossess the vehicle. Some people choose to reaffirm the loan, which means agreeing to keep paying the debt so they can hold onto their car. This choice depends on whether keeping the car is feasible and worthwhile in the long term.
On the other hand, in a Chapter 13 bankruptcy — often called a “reorganization” bankruptcy — things work a little differently. You may be able to include your car loan in your repayment plan and potentially negotiate more favorable terms, such as lowering the interest rate or extending the payment period. In some cases, a process called “cramdown” is possible, where the loan balance is reduced to the car’s current value. This is particularly helpful if your car is worth significantly less than what you owe. However, specific conditions must be met for a cramdown to apply.
Can I Wipe Out a Car Loan Completely?
The short answer: No, you typically cannot discharge a car loan entirely while keeping the vehicle. As previously mentioned, car loans are secured debts, which are treated differently from unsecured debts like credit card balances. Even though bankruptcy can eliminate your personal responsibility for the loan, it does not eliminate the lender’s right to reclaim the car.
If your primary goal is to keep your vehicle, reaffirming the loan might be the right move in a Chapter 7 bankruptcy case. Reaffirmation is essentially a new agreement between you and the lender, stating that you will continue to make payments. It’s crucial to carefully consider whether reaffirming the loan is in your best interest. If you’re unsure whether you can keep up with the payments, reaffirmation might lead to future financial hardship.
In a Chapter 13 case, including the car loan in your repayment plan gives you more control. You can propose a plan that allows you to keep the car and adjust the terms of your loan. For some New York residents, this option can be a practical solution, especially when reliable transportation is a necessity.
