What Happens to a Car Loan after Bankruptcy

January 27, 2012

Those considering bankruptcy have many questions, and one of those is often, "What happens to my car loan after bankruptcy?" As with any bankruptcy questions, there are variations from state to state and you should always consult an attorney for the definitive answer, but you do have options in regard to your vehicle.

Reaffirmation

The first option is called "reaffirmation." With a reaffirmation you essentially make an agreement with the lender to continue to honor that particular debt. Many times in bankruptcy law, singling out a particular debt to pay while discharging the rest is not allowed. However, in the case of mortgages for the property in which you are living and loans for vehicles you need as transportation, there are allowances. One such allowance is this reaffirmation. These are always subject to the approval of the bankruptcy judge.

When you reaffirm a debt, it is almost as if (from a legal point of view) there was never any bankruptcy filed against it. That means you are still subject to the terms of the loan. It also means that if you find yourself later unable to make the payments, the creditor can take you to court for a judgment. They can still repossess the vehicle under the original terms, auction it and hold you responsible for the remainder of the debt.

Pay and Drive

Instead of doing an actual reaffirmation, it might be possible to get the creditor to agree to a plan that is often called "pay and drive." In this situation you include the loan in your bankruptcy, but work out terms with the creditor to continue to make your payments. It's a little harder to get creditors to agree to this one, though. The reason is that if you stop making your payments they can still take the car, but they won't be able to get any kind of judgment issued for any amount not made up in auctioning the vehicle.

Allow Repossession

If you really find yourself unable to make the payments on the vehicle, it might be better to find a cheap car that you can buy with cash and use as transportation. In this instance, you simply include your vehicle loan in the bankruptcy and allow the lender to repossess and auction it. It might not be the best solution, but if after liquidating the rest of your debt you'd still be unable to make your payments (and the car is worth less than you owe) it might be the one that's right for your situation.

Every financial situation is different. It's best to consult with your attorney while working out a bankruptcy before making a decision on how to handle a vehicle loan. Still, it is good to know that there are alternatives available to you. It is possible to file for bankruptcy protection and still keep your vehicle. It might not be the best decision to make, though.

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