Settling Car Loan Debt Through Bankruptcy

Get Car Financing
Even with poor credit.

January 27, 2012

If you currently have an outstanding car loan, and are going through a particularly rough time financially, you may be considering filing for bankruptcy. When you file for bankruptcy, you will be forced to make some potentially difficult decisions regarding your vehicle and the loan associated with it.

This article is not intended to provide any sort of legal advice. If you are considering filing for bankruptcy, then you should seek the advice of a licensed bankruptcy attorney in your area. Only they are qualified to give you legal advice on such matters. The purpose of this article is simply to make you aware of some general options that are available in many areas. The options discussed in this article may or may not be available to you.

When filing for Chapter 7 bankruptcy, you'll be given the opportunity to declare how you wish to approach settling any outstanding car loan debts. Most states allow exemptions for personal use vehicles in a bankruptcy proceeding. However, depending upon the type of vehicle you own, the trustee may or may not allow you to keep the vehicle. Generally speaking, if the vehicle is an exotic or expensive car, and the car is worth much more than you owe on it, a trustee may consider forcing the sale of the vehicle to pay off other outstanding debts or obligations.

If this is not the case, and you own a vehicle that would be considered a more common or everyday use vehicle, the trustee will probably give you a chance to keep the vehicle. If you owe money on the vehicle, to a bank or other lender, you have several options:

Surrender the Vehicle
If you are sure there is no way you can continue making your monthly payments on the vehicle, then you can simply opt to surrender the vehicle to the bank or lender. Once you have surrendered the vehicle to the bank or lender, the bankruptcy court and trustee should discharge the debt. Once the debt has been discharged, your loan obligation to the bank has been settled.

Redeem the Vehicle

In many Chapter 7 bankruptcy proceedings, you are allowed to make a one-time payment to the bank or lender for an amount equal to the retail fair market value of the vehicle. This is called redeeming the vehicle, and can be very beneficial if you have the cash to carry it through. For example, if the retail fair market value of your vehicle is $5000, and you have an outstanding loan balance with the bank of $10,000, you can then pay the bank or lien holder $5000 and the remaining balance will be discharged into the bankruptcy. You will then own the vehicle.

Reaffirm the Vehicle

Concerning car loans, the third option available is reaffirming the debt or obligation to the bank or lender that financed your vehicle. If you choose to reaffirm the debt, you simply state that you agree to continue making payments in the same amount and manner as you did before declaring bankruptcy. If you choose this option, you will be allowed to keep your vehicle; however, the bank or lender still has the ability to repossess the vehicle or sue you if you do not meet your obligations.

Whatever option you select, with regard to settling your car debt in bankruptcy, you should discuss all of your available options with an attorney. For the information contained in this article may or may not apply to you.

Related Questions and Answers

Can You Request a Settlement for Car Loan Debt?

You can request a settlement for a car loan debt if you are having financial hardship. Even though car sales have been creeping up slowly and consumer confidence seems stronger, there are still many people who are being laid off, and the car loan of $435 that last month was easy to keep up, may suddenly be a burden that you just cannot afford. In this situation, you must speak with a bank officer to see if there is a settlement plan available or, if you were smart and bought out of work pay off insurance, you will find your car loan paid off for you in full. In any case, the settlement request can only be made after several months when you are late or may be in danger of losing your car.

Free Credit Score

Get your free credit score now! Get a copy of your most recent credit score.

Get Your Free Score

Auto Insurance

Get competitive quotes on insurance in your area.

Vehicle Warranty

Protect your vehicle and you could save thousands on auto repairs.

Get a Free Quote

Need a Car Loan?

It only takes a minute.

Loan approval is not guaranteed and is subject to credit application and approval of the lender. Individual loan terms may vary. Use of this website constitutes acceptance of's Terms of Use, Disclaimer, Privacy Policy, and Cookie Policy.

Privacy Policy|Do Not Sell My Personal Information|Terms of Use|Cookie Policy|Disclaimer|
COPYRIGHT 1999-2020 MH Sub I, LLC dba