The Bankruptcy Law Clinic Blog

Friday, September 19, 2014

Car Loans and Bankruptcy: What You Need to Know Before Filing

If you think that the car dealer who sold you the car you drive was or is concerned about whether you can handle the payment, think again.  In fact, the majority of car dealers are quite happy to place a customer in a car and car loan with high interest rates and payments for one reason and one reason alone—they still get the commission from the sale, whether that customer can afford the car or not. 

In fact, for some car dealers, there are no limits to the amount of “tweaking” that can be performed to an applicant’s application to make sure the deal happens.  Whether it’s using the entire household’s income to get the applicant approved, or encouraging the applicant to use credit cards as down payments, car dealers and salespeople are certainly not in your corner (from a wise financial standpoint) when trying to sell a car. 

Many people end up filing for bankruptcy partly due to driving a car they can’t afford.  The good news is that in most cases, if the car is repossessed, the balance that remains can be discharged (eliminated) through bankruptcy.  In cases where you need that car to drive to and from work, some auto loans can be retained despite filing for bankruptcy. 

Under Chapter 13 bankruptcy, if the car loan is less than 910 days old, you might have to pay the full value of the car loan to keep the car.  However, there is a possibility that the interest will be reduced under the bankruptcy restructuring.  If the car loan is older than 910 days, the bankruptcy court will likely provide a prorated payment amount based on the vehicle’s worth, not the amount necessary to pay off a high-interest loan.  In Chapter 7 bankruptcy, you’ll likely be given the opportunity to either reaffirm the debt, redeem the car or surrender it.  

Some websites will say you can file a chapter 13 bankruptcy to get back a repo'ed car.  Technically you can, but if this is your only debt, you probably are better off either working something out with the car loan company OR realize that you can't pay the car anyway and assess your options including a chapter 7 bankruptcy.

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