Car Loans & Bankruptcy Guide: How to Keep Your Vehicle in 2026

In this car loan and bankruptcy guide, I address the growing crisis of new car prices averaging over $48,000 and household debt continuing its upward climb as we face a bankruptcy surge.

If you are struggling to keep your vehicle while facing mounting bills, understanding how the Bankruptcy Code treats secured auto debt is critical to your financial recovery.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on February 2, 2025.

Key Takeaways: Navigating Your Car Loan in Bankruptcy

• The “910-Day Rule:” To “cram down” a car loan (reducing the loan balance to the car’s actual market value), you must have purchased the vehicle at least 910 days (approx. 2.5 years) before filing.
• The Power of the “Cramdown”: For loans older than 910 days, you only pay the Fair Market Value of the car through your Chapter 13 plan. The remaining balance is treated as unsecured debt and is often discharged for pennies on the dollar.
• Interest Rate Relief (The “Till” Rate): Even if you don’t qualify for a balance reduction, bankruptcy often allows you to lower a high-interest auto loan to a court-approved rate (the “Till” rate), which is typically significantly lower than “buy-here-pay-here” or subprime financing.
• Chapter 7 “Redemption” vs. “Reaffirmation”: * Reaffirmation: You sign a new contract to keep the original loan terms. While in a Redemption, you pay the lender the car’s current value in a single lump sum to own it outright.
• Equity Protection via Exemptions: Your ability to keep a car in Chapter 7 depends on your state’s motor vehicle exemption. If your car has $10,000 in equity but your state only allows a $5,000 exemption, that $5,000 gap is what belongs to the bankruptcy estate.

The 2026 Economic Snapshot

To understand why bankruptcy filings are surging, we only need to look at the current data from the Federal Reserve:

Auto Loan Delinquencies: As of early 2026, serious delinquencies (90+ days) remain near 5%, a level not seen consistently since the 2010 aftermath of the Great Recession.

Total Debt: Total household debt has surpassed $18 trillion, with auto loans accounting for $1.66 trillion of that burden.

Interest Rates: While mortgage rates have stabilized near 6.1%, auto loan APRs for subprime borrowers still frequently exceed 13-19%, making monthly payments unsustainable.

Negotiating With Your Car Loan Lender Before the Filing

Before stepping into court, explore whether your lender is open to a deferment or forbearance. Creditors learned their lesson following the Great Recession, and so many lenders prefer a two-to three-month payment “pause” over the costs of repossession and reselling a vehicle at an auction in a fluctuating used-car market.

Chapter 7 Bankruptcy: The “Fresh Start” and Your Car

In a Chapter 7 liquidation, the primary goal is to wipe out unsecured debt (like credit cards and medical bills). Regarding your car, you generally have three choices:

1. Surrender: You give the car back and wipe out the entire loan balance, including any “deficiency” (the gap between the car’s value and the loan amount).
2. Reaffirmation Agreement: You sign a new contract to remain liable for the debt. You get to keep the car, but you are “on the hook” personally if you default later.
3. Redemption: You pay the lender the fair market value of the car in one lump sum. This is rare because most debtors don’t have access to that much cash.

Professor’s Note: Chapter 7 offers no mechanism to force a lender to lower your interest rate or catch up on missed payments over time. If you are behind on payments and want to keep the car, Chapter 13 is your best option.

Chapter 13: The Strategic Reorganization

Chapter 13 is often the superior choice for car owners because it treats the auto loan as part of a three-to-five-year repayment plan. It allows you to:

Cure Arrearages: If you are behind on your car loan payments, you can spread those missed payments over the life of your plan, stopping repossession immediately.

The “Cramdown” Advantage: This is the “holy grail” of auto debt relief, potentially saving you thousands of dollars.

The Chapter 13  Bankruptcy “Cramdown” Explained

A cramdown allows you to reduce the principal balance of your car loan to the actual retail value of the vehicle. The remaining balance is treated as unsecured debt (often paid back at pennies on the dollar).

For example, suppose you owe $20,000 on your car loan, but your car is worth $12,000. Your car has $8,000 negative equity or is “upside down” in value by $8,000. With the Chapter 13 cramdown, you can reduce your car loan by the $8,000. You can see the potential to save thousands of dollars! But there are limits to the cramdown.

The “910-Day Rule” Constraint

To qualify for a cramdown on a personal-use vehicle, you must have purchased the car at least 910 days (about 2.5 years) before filing your bankruptcy petition. If you bought the car more recently, you generally must pay the full balance, though you may still be able to lower the interest rate to a “Till rate” (the prime rate plus a small risk premium). Lenders tend to be flexible and usually prefer that the debtor keep the car.

The Professor’s Conclusion: The Importance of “Number Crunching”

As I discuss in my textbook Consumer Bankruptcy Law, successful bankruptcy is not just completing forms, but calculating a debtor’s best options. A Chapter 13 plan requires balancing your “disposable income” against your secured and priority debts.

Before assuming you can’t afford to keep your car, have the bankruptcy attorney run the numbers. With the current high interest rates, simply lowering a 15% APR to a 7% “Till rate” through a Chapter 13 plan can save a household hundreds of dollars a month, even without a full cramdown.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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

Updated initially on December 17, 2024.