If I file bankruptcy, what happens to my car loan?
You can continue payments, reaffirm the loan or surrender the vehicle
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Filing for bankruptcy can significantly impact your car loan, depending on the type of bankruptcy file, how much equity you have in the car and if you want to keep the car. Before deciding if bankruptcy is right for you, it’s important to understand how it affects your car loan, the risks of repossession and your options for keeping your vehicle.
If your car is worth significantly more than the loan, some of that equity may need to be used to repay creditors, especially in Chapter 7.
Jump to insightYou must stay current on your payments if you want to keep your car.
Jump to insightConsider refinancing your auto loan, reaching a debt settlement agreement and other alternatives before bankruptcy.
Jump to insightHow Chapter 7 bankruptcy affects your car loan
Chapter 7 bankruptcy can discharge car loan debt, but your lender has the right to repossess your car. This is because the loan is secured by the vehicle itself. If you stay current on your car payments, you can keep your car, but you may need a reaffirmation agreement with your car loan lender.
In other words, you can get rid of your car loan, but you may not be able to keep your car. You can only keep your car if you keep up with payments. Because it’s a secured loan, bankruptcy cannot protect you from getting your car repossessed except with an automatic stay.
Ultimately, if you want to keep the car, you can reaffirm your loan or pay a redemption, which allows you to pay the fair market value of the car in a single payment to your lender. Or you can surrender the vehicle.
What is a reaffirmation agreement?
A reaffirmation agreement removes your vehicle loan from bankruptcy protection and reestablishes your responsibility for payments. If you stay current on your payments, your lender usually lets you keep the vehicle.
» COMPARE: Debt settlement vs. bankruptcy
How Chapter 13 bankruptcy affects your car loan
When you file Chapter 13 bankruptcy, you set up a repayment plan based on your ability to repay the debts you owe. Over three to five years, you’ll repay some — or all — of your debts. Once the payment plan is completed, you won’t owe any more consumer debts.
Since a car loan is a secured loan, your lender retains the right to repossess your vehicle unless you catch up on your payments and stay current on your loan.
You can, however, negotiate the balance down by utilizing a “cramdown”. Cramming down your balance requires the car loan lender to reduce what you owe to the current fair market value of the vehicle, lowering your monthly payments.
Risks of car repossession during bankruptcy
Your car may be protected in bankruptcy, but not always. When you file for bankruptcy, the court usually orders an automatic stay on your assets — preventing collection efforts and repossession of your vehicle. This stay lasts as long as you follow the plan outlined in bankruptcy court — but the stay may be lifted if you miss payments.
Each state has its own rules governing your assets in bankruptcy, with exemptions in place that may protect your car from being repossessed. You can usually keep your car if you need it for work or if the value of the car is below your state’s exemption limits.
In general, if you don’t make on-time payments on your car loan, your lender can repossess the car. And if you’re in bankruptcy but your car’s equity is more than the state-allowed exemption, you will have to pay the difference to keep your car.
» MORE: Should I file for bankruptcy?
Alternatives to bankruptcy for managing car loans
In most cases, it’s not worth filing Chapter 7 bankruptcy just to help with your car loan. You can refinance your car loan, get a personal loan to pay it off or contact your lender to come up with a payment plan to catch up on payments.
- Auto loan refinancing: You may be able to lower your monthly payment by refinancing your car loan. Sometimes, you can extend your car loan term (up to 84 months), which can help you lower monthly payments to make them more affordable. You might also be able to lower your interest rate if you’ve improved your credit score since you first took out the loan.
- Debt settlement: Working with a debt settlement company may help you lower your car payments or reduce what you owe on the vehicle. Often, if your car doesn’t have much value, it can be worth it to your lender to settle on a loan payoff amount that’s less than what you owe.
FAQ
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 13 bankruptcy doesn’t liquidate your assets but comes with a debt payoff plan for your outstanding debts. If you make on-time payments on your loan, you can usually keep your car. But if you fall behind and can’t keep up on Chapter 13 payments, your lender has the right to repossess your vehicle.
Chapter 7 bankruptcy can help you eliminate debts that you can’t afford to repay — but you might lose your car in some cases. Your bankruptcy trustee can liquidate some of your assets to help pay off the debts you owe — and this may include your vehicle in some cases.
Is filing bankruptcy worth it for car loans?
Not usually. Because auto loans are secured to your vehicle, your lender has the right to repossess your car if you can’t keep up with your payments. You can potentially lower what you owe on your car with a Chapter 13 bankruptcy “cramdown,” but this can still severely hurt your credit score.
» RELATED: Will bankruptcy stop wage garnishment?
What if my car loan is already paid off?
If you own your vehicle outright and your car value is under the state’s exemption limit for a vehicle, you can keep your car. If you do have a car loan and are up-to-date on payments, you must subtract the loan balance from the car’s fair market value to determine if your car equity is below the state’s exemption limit. At worst, if you have too much equity in your vehicle during Chapter 7 bankruptcy, you may need to pay the difference between your vehicle equity and the exemption limit.
How does an automatic stay affect my car loan?
An automatic stay is put in place when you file for bankruptcy. It prevents lenders from collecting on debts while a plan for handling your debts and assets is developing. Your auto loan lender cannot repossess your vehicle while the automatic stay is in place.
Article Sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from reputable publications to inform their work. Specific sources for this article include:
- U.S. Courts, “Chapter 7 - Bankruptcy Basics.” Accessed Jan. 16, 2025.
- U.S. Courts, “Chapter 13 - Bankruptcy Basics.” Accessed Jan. 16, 2025.
