What Happens to Car Loans After Bankruptcy?

Your car loans after bankruptcy will either be restructured or settled, depending on the type of bankruptcy you qualify for. There are two primary forms of bankruptcy protection for individuals: Chapter 7 and Chapter 13.

Chapter 7 Loan Settlement

With a Chapter 7 filing, you will be liquidating your assets to pay off all your debts. A court will be ordering the liquidation for you, instructing you on which assets to sell and how much to provide each lender. In this case, your car will likely be repossessed and sold at auction. The sum earned will be used to settle your car debt. You will have to seek a new loan after bankruptcy, but you will likely be forced to lease for a few years as your credit is repaired. 

Chapter 13 Reorganization

A Chapter 13 filing allows you to keep your assets and simply restructure all of your payments. While this still appears as a bankruptcy on paper, you will be able to recover faster because you maintain control of your assets. Your car loan will be modified to lower monthly payments you can afford. As you continue to pay off the loan, you will eventually own the asset out right, but further in the future than you had originally planned.

What happens to a leased car in bankruptcy?

If you declare bankruptcy, you will likely be able to continue driving your leased car. Whether you can keep the vehicle depends on the terms of your lease and the financial decisions made in your bankruptcy. A judge may order you to terminate a lease so the money may be used to repay a senior debt. However, this is rare, since you can typically argue that would place undue hardship on you. As a result, you will likely be able to keep your car as long as the leasing company does not have a termination in the case of bankruptcy clause.

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