Car Loans and Bankruptcy: How to Keep Your Car

Thinking about filing for bankruptcy but worried about your car? It’s a concern for all debtors. But don’t worry. In this post, I’ll discuss what happens to car loans during bankruptcy and a hidden risk many cosigners and co-borrowers face. We’ll explore how reaffirmation agreements and bankruptcy affect cosigners and co-borrowers.

Updated on December 29, 2024.

Key Points:

• You can keep your car even if you file for bankruptcy.
• Knowing your car’s equity helps in figuring out your next step.
• Because of the Fair Debt Collection Practices Act (FDCPA), your car lender will likely stop contacting you.
• You must continue to make car payments while in bankruptcy if you want to keep the car.
• Exemptions vary per state and affects your car’s equity.

Filing for Bankruptcy:

There’s no doubt that for most of us, a car is more a necessity than a luxury. It reminds me of a consultation with a bankruptcy client who, during the consultation, was asking about his options regarding keeping his car if he filed for bankruptcy. He told me how he needed his car because living without a car in Miami was like walking through the streets of downtown with no shoes.

So, of course, like most of my clients, they want to know if they can keep their car when they file for bankruptcy. For the most part, the answer is yes, but I will explain situations where keeping your car might be an issue if bankruptcy is filed.

What Happens When a Bankruptcy Petition is Filed

When a bankruptcy petition is filed, and there is a vehicle involved, several issues present themselves. Let’s review each possible scenario that may occur.

Scenario One – There is a Car Loan

The first issue is if the car is secured by a loan. If your car is secured by a loan, note that filing for bankruptcy does not wipe out your car loan. That is a common belief held by debtors, but the only way the car loan would be wiped out is if the car is surrendered to the trustee or the lender.  

How Your Lender May React to Your Bankruptcy

If there is a car loan, your lender may stop sending you monthly statements. The reason is that lenders believe that by doing so, they are violating what is known as the automatic stay. The automatic stay means that when a bankruptcy petition is filed, most collection actions must stop immediately. The automatic stay does not apply to all cases, for example, cases in family court that involve issues of child support and alimony, known as Domestic Support Obligations (DSO).

Managing Car Loans During Bankruptcy: Key Tips

Lenders are also concerned that sending statements is a violation of the automatic stay and the Fair Debt Collection Practices Act, so you will likely not receive any notification that a payment is due. Sometimes, debtors who are self-represented take this as confirmation that they no longer have to make payments on the car, and once they receive the Order of Discharge, the lender begins taking steps towards repossessing the car. You can imagine how complicated things got in a hurry.

Lenders, besides no longer sending statements once the bankruptcy petition is filed, won’t likely send any notifications either, whether by regular mail, e-mail, or text messages. However, it is important that you continue to make those payments timely so there are no issues of losing your car.

Also, it’s very common for lenders to even restrict or block you completely from accessing your account online, but don’t worry, I’ll explain the simple solution to this.

Lenders usually have no issue accepting your monthly payment if you call by phone, and the payment can be made with your checking account, such as an ACH payment. If not, you can have your payment sent by your bank with an electronic check, or if you want to go old school, send your car payment via mail with a regular check. It’s important to keep track of your payments because it’s very easy to forget during this time that the payments are not coming out of your account automatically.

Once your bankruptcy is approved and you receive your Order of Discharge, then your creditor will return to accepting payments like usual.

Scenario 2- The Reaffirmation Agreement

If you have a car loan, the lender is likely to require that you sign a reaffirmation agreement. A reaffirmation agreement is simply a separate document signed by the lender, the debtor, and sometimes the debtor’s attorney. The reaffirmation agreement is a way to prove to the lender that you will continue to make payments on the secured debt whether a car loan or mortgage and that you are keeping that asset, in this your car. Once the reaffirmation agreement is signed by all parties, it is submitted to the bankruptcy judge for signature.

I will discuss in a separate post the common pitfalls that occur with a reaffirmation agreement.

It’s important to know that with a reaffirmation agreement, nothing really changes regarding your car loan. For example, the balance on the car loan, the monthly payment, and the interest rate will remain the same. This includes how many months are left on the loan. But before you sign the reaffirmation agreement, the biggest issue with your car and filing for bankruptcy is the equity in your car

How Does My Car’s Equity Affect My Bankruptcy Case

Remember that upon filing for bankruptcy estate, the assets of the debtor belong to the bankruptcy estate. However, the Bankruptcy Code allows for exemptions, which is another way of saying protections. Note that exemptions vary per state.

Your Car Loan, Co-Signers, Co-Borrowers, and Bankruptcy

To figure out the exemptions, you just have to know what is the equity in your car. So, what is the fair market value of your car? Basically, what is your car worth minus the car loan balance? That difference is known as equity. Once you know the equity amount, subtract your state’s exemption to determine how much belongs to the bankruptcy estate.

Below, you will see an example that was used in a prior post regarding equity. In this case, the exemption was $1000, which is the motor vehicle exemption offered in the state of Florida. If the equity in your car exceeds the exemption, then the trustee can require you to pay back that amount. If your car’s value does not exceed the exemption, then there is no issue because the trustee would not be interested in your vehicle.

Realistically, cars lose their value quickly, which is known as the depreciation value. Because of that, most cars that have a car loan tend to be protected because of the exemptions.

I hope this post how to better understand how your car is handled when bankruptcy is filed. If you have any questions, feel free to reach out to me via e-mail so I can answer your question as part of the Reader’s Questions Forum. You could reach out to me via X/Twitter @alex_bkc_prof.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon books. To access my YouTube channel, click this link.

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• Bankruptcy
• Your Wallet

Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.