Will I lose my car if I file bankuptcy?

Stephen Behrends • December 6, 2020

Many people wonder if they will lose their car if they have to file bankruptcy. The answer is, of course, complicated but usually it is "No!"

Keeping your car can be essential to getting a fresh start. Is there a danger that you will lose it if you have to file bankruptcy? Usually the answer is no but it is complicated.

Most people owe money on their car so we'll discuss that situation first.

The process here is called "Reaffirmation." This means that you have to agree that you will continue to make the payments and that the lender on the car won't be affected by the bankruptcy. At first glance, this seems like just what you want-- so what's the problem?

It's the danger of the "deficiency!" Most people know that if you have to give a car back or if you can't pay and it's repossessed, the bank or credit union will sell it at auction and that you will still owe them what they don't collect through that process. This is called "the deficiency." But is that still true after bankruptcy? Wouldn't the debt be wiped out so that all they could do is repossess the car? Wouldn't be the end of it?

The answer is that the reaffirmation means that you are responsible for the debt just as though you didn't file bankruptcy at all and so you would still have to pay the deficiency if the car was repossessed or returned after the discharge had been entered.

So one way to avoid this risk, especially if the car is worth much less than what you still owe, is to do a different process, called a "redemption." This means paying what the lender the value of the vehicle in a lump sum. The question, of course, is where would you come up with that money? The good news is that there are lenders who specialize in these loans. You would need a down payment but they will look at the value of your vehicle and tell you what they would loan on it. If you could make a down payment to come up the difference between the value and that loan amount, we would go to the original lender and offer to redeem the car or truck. If they wouldn't agree on the value, the court can force them to accept a fair value for their payoff.

Otherwise, you just have to reaffirm the loan and hope that after getting rid of the rest of your debt, it will be easier for you to pay your car loan.

Another alternative is just to let it go back and buy a used car for cash and drive it for a couple of years while you rebuild your credit and then get a newer used vehicle.

The other situation is if you own your car free and clear. It is still likely that you will be able to keep it. For most people, there are exemptions available to protect their vehicle(s) in bankruptcy. If you have a vehicle that is paid for and is worth a lot, you might have to negotiate a payment to the Ch 7 trustee for the non-exempt equity. This is not uncommon and, of course, we help our clients with this process just like we help them with redemptions and reaffirmations.

Please call or email if you have questions about your car and whether you would lose it if you had to file bankruptcy.

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