What Happens to my Car or Vehicle When I File for Bankruptcy?

Stop your vehicle repossession now! Filing for bankruptcy and your car.

When many of our Auburn bankruptcy clients first contact our offices, they are very concerned about losing their vehicle. And, rightfully so. How can you even get to work without a car? Unfortunately, there's a lot of confusion out there regarding filing for bankruptcy and what happens to someone's care when they do so. Here's what you need to understand.

If you can afford to keep making your payments after wiping out your creditors, bankruptcy is often one of the most effective ways to keep your car from being repossessed. Bankruptcy offers ways to shed debt while holding on to one of your most important assets – your car. If you are making payments on a car, you can usually keep the car in bankruptcy so long as you keep making the payments. Bankruptcy can also offer ways to restructure your payments to make them more affordable, Most importantly, filing for bankruptcy improves your monthly cash flow to make payments easier to handle.

For cars that are paid in full or have equity (the balance of the loan is significantly less than the value of the car), bankruptcy exemptions protect the vast majority of cars in Chapter 7 cases. Both federal and Washington state bankruptcy exemptions protect approximately $3,500 in the equity of your car. You can also stack a wildcard exemption on the car exemption. The state wildcard exemption is $3,000 and the federal wildcard exemption is up to $11,975.

If you are making payments on a car, filing a Chapter 7 bankruptcy provide three options. You can surrender the car back to the creditor and walk away from the debt. You can keep making the contract payments as usual. The third option is a redemption. No single option is best for every situation. But, after getting some initial baseline information from you, our Auburn bankruptcy lawyers will be happy to explain these options in detail.

If you choose to keep making the payments, the creditor will want you to sign a reaffirmation agreement. A reaffirmation agreement takes the car loan outside the bankruptcy discharge. Even if you are current on the payments after bankruptcy, the car company can repossess the car if you do not sign a reaffirmation agreement.

Many car companies will allow you to keep the car if you are current with the payments without a reaffirmation. If the lender is requiring a reaffirmation agreement, one of our Auburn car repossession lawyers will help to fully understand your legal rights and future obligations when it comes to this kind of an agreement. They are not be entered into lightly.

Because there is a risk that the car could be destroyed without insurance or you could fall behind on payments after the bankruptcy, making you liable for the loan deficiency, you should carefully consider signing a reaffirmation agreement for your car in a Chapter 7. Again, every client and every situation is unique. Our Auburn bankruptcy lawyers will work closely with you to help you choose the best option here given your unique facts and circumstances.

The redemption option involves paying off the balance of the car loan at the value of the car. This option makes sense if the car is worth a lot less than the loan balance. Some finance companies can loan you money while you are in bankruptcy to redeem the car.

In a Chapter 13, you can restructure your car loan as a part of a payment plan by making payments over three to five years. It allows you to reduce the interest rate. If you purchased the car over two and a half years ago, you can also “cram down” the car loan. That means you pay the car’s actual current value in full into the plan while paying any loan balance in excess of the car’s value as unsecured debt at a percentage as low as 0%.

The “cram down” option is also available for refinanced loans regardless of when they were taken out. As long as your plan is confirmed, you keep current on your plan payments and you keep the car fully insured, the Chapter 13 will protect your car. You will get the title to the car once the plan is completed.

Even thinking about filing for bankruptcy is scary. This is especially true when you are afraid of losing your primary means of transportation. Our Auburn car and vehicle repossession lawyers understand how scary it is to be facing such a prospect. Fortunately, the bankruptcy laws provide several options for keeping your car, which one is best for you will depend entirely on the specific facts and circumstances of your case.

If you have questions about your legal rights and options when it comes to your car or vehicle while seeking bankruptcy protection and relief, we strongly suggest that you consult with one of our Auburn bankruptcy professionals. They will be happy to review your case and then lay out your legal options.