Financed vehicles can be a major concern in personal bankruptcy. Some people file because they are worried their lender will repossess the vehicle. Others will have to make a decision about what happens to the vehicle after they file.
Unsecured lines of credit typically close when you file for bankruptcy, and the remaining balance is eligible for a discharge. However, since there’s collateral property attached to your car loan, you can’t just discharge the debt and keep the vehicle.
You’ll have to make a decision. You can give up the vehicle and discharge the debt, or you can reaffirm the loan. What is the right choice?
Consider the terms and how long you’ve made payments
The easiest way to make a practical decision about a financed vehicle during bankruptcy is to look at whether you will be able to manage the loan after your filing.
If the balance on the account is high enough because the loan is new, you may still struggle to make payments and have very little equity accrued in the vehicle. However, if you’ve made payments for some time or if you need a vehicle for daily life, surrendering your vehicle may not be a good option.
Before you reaffirm the debt, you may be able to try renegotiating the terms with your lender, or if you filed a Chapter 13 bankruptcy you can frequently force the creditor to accept a much lower interest rate. In a Chapter 13 you can also prevent the creditor from repossessing the vehicle even if you are many months delinquent in the payments. .Understanding what happens to your debts during a bankruptcy filing can help you plan the right way forward during a difficult financial time.