Filing For Chapter 7 Bankruptcy With an Auto Loan

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - February 8, 2021

Keeping your auto loan once you file for Chapter 7 bankruptcy can be difficult. Chapter 7 is considered a liquidation bankruptcy, and your trustee is responsible for selling your non-exempt property in order to repay your creditors – and this could include your vehicle. Here’s what you need to know.

Do You Qualify For Chapter 7?

Not everyone is able to qualify for a Chapter 7 bankruptcy. In order to be eligible, you have to qualify by passing a “means test,” which is the first step to proving that you don't make as much as you owe. A means test is used in Chapter 7 to weed out high-income filers who should be filing a different chapter of bankruptcy.

The test calculates whether or not you have the ability to repay any of your debts, including auto loans. If you pass the test, it means you don't have enough income to successfully repay your debts and you're eligible for a Chapter 7 bankruptcy.

To see if you pass, the means test looks at your average income for the six months prior to filing. Then, it compares your income to the median income of a family with the same number of household members in your state, taking into account many factors and living expenses.

If you have a low income you should be able to pass the means test quickly – typically within a few steps. If your income level is higher than the median income of your state, you have to continue on with the means test, though, which is designed to take a deeper look at your living expenses in these cases.

CarsDirect Tip: There can be a lot of paperwork involved in filing for a Chapter 7 bankruptcy, and even small clerical errors could get your bankruptcy thrown out. To avoid this, we recommend following all form instructions, double-checking your calculations, and getting legal help with your bankruptcy filing if necessary.

Chapter 7 Bankruptcy and Your Auto Loan

It's important to know how to file before you start your paperwork when it comes to Chapter 7 bankruptcy because you have to make certain determinations about filing right upfront. One thing you need to decide on before you file is what to do with your car loan.

When you have an auto loan, the vehicle secures the loan and your lender is listed on the title as a lienholder. This means they own the vehicle until you pay off the loan. If you file Chapter 7 bankruptcy before you're done with your loan, you're responsible for continuing payments if you want to keep the car.

If you can't keep up with your loan the lienholder can repossess the vehicle. After they do this you’re responsible for repo and storage fees, along with any deficiency balance left over after the sale or auction of the car.

If you think you can make arrangements to pay off or keep up with your loan, you typically have three choices during Chapter 7 bankruptcy:

  1. Redeem your loan – To redeem an auto loan you have to pay the lender the current market value of the vehicle in one lump sum. This option comes in handy if you have negative equity (owing more on the loan than the car’s worth). For example, if you owe $5,000 on your auto loan, but your vehicle is only worth $3,000, you could keep your car and save $2,000 by redeeming your loan for the vehicle value. This is often difficult to do, though, especially if you're considering filing for bankruptcy.
  2. Reaffirm your loan – Reaffirming your loan involves making a deal with your lender to continue making car loan payments throughout your bankruptcy. In some cases, your lender may even be able to redraw your contract to make the terms easier to meet during your Chapter 7. However, your options vary by lender and your specific situation.
  3. Surrender your vehicle – If you don't have the funds to make a lump sum payment to redeem your loan, and you can't keep up with the payments or make an affirmation agreement with your lender, you may have to consider surrendering your vehicle. This is technically a voluntary repossession. You're willingly returning the car and avoiding the extra cost that can come from having a recovery service tow and store your vehicle.

Because there's no system for making payment arrangements in a Chapter 7 bankruptcy, it's important to know the value of your vehicle and whether or not there's equity in it before you file. To find out the estimated value for your vehicle you can visit websites such as Kelley Blue Book or NADAguides, or ask a bankruptcy expert about appraising your car's value. In order to see if there's equity in your vehicle, compare its estimated cash value to the balance on your auto loan.

Unable to Keep Your Car Loan?

If you aren't able to keep your car loan when you file for Chapter 7 bankruptcy, you may still be able to get into another auto loan. It can be tough to find a lender who works with open Chapter 7 bankruptcy, but you don't have to search in vain.

At CarsDirect, we have a coast-to-coast network of special finance dealerships that are signed up with subprime lenders. Many of these lenders are willing to work with bankruptcy borrowers that can't wait until their liquidation bankruptcy is discharged before getting into another vehicle. Skip the hassle of searching for the right lender on your own, and fill out our fast, free, no-obligation car loan request form, and we'll get to work connecting you with a dealer in your area.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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