Can You Refinance Your Auto Loan while in Bankruptcy?

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Contributing Writer

Amy Fortune is a contributing writer for CarsDirect and lead writer/editor for AutoCreditExpress. She also contributes regularly to several other high-traffic blogs. Amy was born in North Carolina and grew up with an appreciation for NASCAR and everything automotive. Now based in the Motor City, she continues to be happily immersed in car culture and automotive finance.


, Contributing Writer - February 9, 2017

In both Chapter 7 and Chapter 13 filings, refinancing an auto loan while in bankruptcy probably won't be an option. However, there are alternatives that resemble refinancing. And these options vary, depending on the type of bankruptcy filed.

Auto Loan Options during a Chapter 7 Bankruptcy Filing

If a Chapter 7 bankruptcy filer is still paying for a car, they have a few options to consider when it comes to their auto loan. The first decision that the filer has to make is whether or not they wish to keep the vehicle. If they don't want the car or know that they can't afford it, they can surrender it to the lender and walk away.

But if they want or need to hold onto the vehicle, most bankruptcy filers must choose one of three options. They can reaffirm the loan, redeem the car or negotiate with the lender.

Reaffirmation: If a car owner wants to continue making payments on their vehicle after filing for Chapter 7 bankruptcy, they can simply reaffirm the loan. In order to do this, the filer must enter into a contract with the lender, stating that they intend to continue paying off their balance in spite of the bankruptcy. The lender, in turn, agrees to not repossess the car as long as payments are current.

After both parties agree on a reaffirmation contract, the car loan will not be discharged in the bankruptcy. But if the filer stops making payments on the loan, the contract nullifies and the lender may repossess the car.

Redemption: A consumer entering Chapter 7 with extra cash and a car loan to pay off can save some money by opting to redeem their car. With this option, the bankruptcy filer pays off the vehicle in one lump sum that is equal to its current value. This means that if their loan balance is higher than the car's fair market value, they won't be obligated to pay the difference. Instead, the remaining balance will be discharged in their bankruptcy.

For those who don't have the cash on hand to provide a lump sum payment, there are lenders that will provide funds for vehicle redemption. However, taking on new debt is seldom advised in a bankruptcy filing.

Negotiation: In some cases, a car owner who is going into Chapter 7 may be able to negotiate directly with their lender. For example, if the filer is on the fence about whether they want to surrender the vehicle or keep it, they may have some leverage when it comes to the terms of their loan. Some lenders might restructure payments based on the car's actual value. Or they might eliminate some of the interest charges if it keeps a filer from turning in the vehicle.

With a Chapter 7 filing, a lender isn't obligated to negotiate. But because most lenders will do what they can to recoup as much of their money as possible, filers who can't afford redemption should at least try.

What Happens to an Auto Loan during a Chapter 13 Bankruptcy Filing

In a Chapter 13 bankruptcy, debts aren't discharged and wiped away. Instead, the filer agrees to pay creditors a portion of what they owe over a three- or five-year period. And if the filer has a car loan, one of two things will typically happen.

The 910 Rule: If a consumer purchased the car that they're still paying for within 910 days of their Chapter 13 filing, they are responsible for paying off their entire loan balance. However, they may get a break on their interest rate.

The Cram Down: Individuals who financed a vehicle more than 910 days prior to their Chapter 13 bankruptcy filing are eligible for a loan "cram down." This means that they will only have to make payments to the lender based on what the car is actually worth, instead of their entire loan balance.

Getting a Bad Credit Car Loan after Bankruptcy

If you have completed a Chapter 13 or Chapter 7 bankruptcy and need to buy a car, CarsDirect can help. Even if your credit is bad, we can match you with a dealership in your area that can work with unique credit situations.

Our process is fast, free, and comes with no obligations. Go ahead and fill out our quick and simple 1-Step Auto Loan Request to get started today.

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, Contributing Writer

Amy Fortune is a contributing writer for CarsDirect and lead writer/editor for AutoCreditExpress. She also contributes regularly to several other high-traffic blogs. Amy was born in North Carolina and grew up with an appreciation for NASCAR and everything automotive. Now based in the Motor City, she continues to be happily immersed in car culture and automotive finance.


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