Don’t Lose Your Ride: Exploring Chapter 7 and 13 Bankruptcy for Car Loans

Have you ever found yourself struggling to make payments on your car loan? You’re not alone. Many people across the United States face challenges when keeping up with car payments. It can feel overwhelming and stressful, wondering how you’ll manage to keep your car while juggling other bills. But here’s some good news: there’s a car loan bankruptcy alternative that could help you out. 

Bankruptcy is a legal way to get some relief from debts you can’t afford to pay. While it might sound scary, bankruptcy can help with car loan troubles. In the U.S., there are two main types of bankruptcy that people often use to get back on track with their finances: Chapter 7 and Chapter 13.

Quick Summary:

• Bankruptcy offers financial relief from unmanageable debts, providing a solution to car loan troubles.
• Chapter 7 and Chapter 13 are the two main types of bankruptcy in the U.S., each offering unique ways to address debt and car loans.
• Chapter 7 bankruptcy or “liquidation bankruptcy” wipes away many debts, allowing for a fresh financial start. It offers options to keep, buy, or surrender your car.
• Chapter 13 bankruptcy involves a repayment plan to pay back debts over time, allowing for a catch-up on missed payments and a potential reduction of loan amounts.
• Chapter 7 bankruptcy can affect your car loan by giving you options to reaffirm, redeem, or surrender the vehicle. It provides a chance to renegotiate car loan terms or even eliminate the debt, depending on your situation.
• Chapter 13 bankruptcy allows you to include your car loan in a repayment plan and avoid repossession. It may also offer the possibility of reducing the loan amount to the car’s current value, making payments more manageable.

Understanding Chapter 7 vs. Chapter 13 Bankruptcy

When dealing with debt, you might hear about two main types of bankruptcy: Chapter 7 and Chapter 13. Both can help you get back on your feet financially, but they work differently. Let’s break down what each one means and how they can help you.

Chapter 7 Bankruptcy

Think of Chapter 7 as a fresh start. This type of bankruptcy is often called “liquidation,” which means some of your assets might be sold to pay off what you owe. But don’t worry, you won’t lose everything. There are rules about what you can keep, like your home, car, and basic things you need to live.

When you file for Chapter 7, a trustee—a person overseeing your case—will look at what you own and what you owe. The best part about Chapter 7 is that many of your debts can be wiped away completely. That means you won’t have to pay them back. It’s like hitting the reset button on your finances.

Chapter 13 Bankruptcy

Chapter 13 is a bit different. Instead of selling your stuff, this type of bankruptcy lets you make a plan to pay back some or all of your debts over time. You’ll make monthly payments based on what you can afford, usually for three to five years.

The court helps you make this plan and considers things like your income, expenses, and types of debts. The goal is to make monthly payments manageable for you while still paying back your creditors.

One big advantage of Chapter 13 is that it can help you keep necessary things like your home or car, even if you’ve fallen behind on payments. It’s a way to catch up and get back on track. 

The Impact of Chapter 7 vs. Chapter 13 Bankruptcy on Car Loans

If you’re facing tough financial issues, you might be thinking about bankruptcy. When it comes to car loans, Chapter 7 and Chapter 13 bankruptcy can have different impacts. Here’s what each one means for your car loan:

What Happens to Your Car in Chapter 7?

Chapter 7 bankruptcy can affect your car loan in different ways. Whether you want to keep your car, buy it for less, or let it go, there are options to consider. Understanding your choices and how they’ll impact your car loan before filing for Chapter 7 is crucial.

Reaffirming Your Car Loan

One option with Chapter 7 is to reaffirm your car loan. That means you agree to keep making payments on your car, and in return, you get to keep it. 

Redemption: Buying Your Car for Less

Another option in Chapter 7 is called redemption. You can buy your car by paying its current value, which might be less than what you owe. If your car is worth less than your loan amount, redemption can be a good deal to save money.

Surrendering Your Car

If you can’t afford to keep your car or don’t want it anymore, Chapter 7 lets you surrender it. That means giving the car back to the lender. Once you surrender the car, you won’t owe any more money on the loan, even if the car is sold for less than what you owe.

What Does Chapter 13 Mean For Your Car Loan?

If you’re considering bankruptcy, Chapter 13 is another option you might come across. Unlike Chapter 7, which is quicker, Chapter 13 involves a repayment plan where you pay back some or all of your debts over time.

Chapter 13 bankruptcy offers several ways to manage your car loan and keep your car. Here’s how it can affect you:

Including the Car Loan in Your Repayment Plan

One of the benefits of Chapter 13 is that you can include your car loan in your repayment plan. That means you’ll make one monthly payment to the bankruptcy trustee, who will then distribute the money to your creditors, including your car lender. It’s a way to catch up on missed car payments and keep your car.

Cramdown: Lowering Your Loan Amount

In some cases, Chapter 13 allows for a “cramdown” on car loans. A cramdown lets you reduce the amount you owe on your car to its current value. That can make your car more affordable and reduce your monthly payments.

Stopping Repossession

If you’re behind on car payments and worried about repossession, filing for Chapter 13 can halt it. An “automatic stay” goes into effect as soon as you file. The automatic stay legally prevents creditors, including your car lender, from taking collection actions like repossession. That gives you time to catch up on payments through your Chapter 13 repayment plan.

Completing Your Repayment Plan

In Chapter 13, your repayment plan will last three or five years, depending on your income and other factors. Once you complete the plan and make all the required payments, any remaining balances on your car loan or other debts included in the plan might be wiped out. That means you could end up paying less than what you originally owed on your car.

Both Chapter 7 and Chapter 13 bankruptcy offer ways to manage car loans, but they work differently. Chapter 7 might be better if you want to get rid of your car or if it’s worth less than what you owe. On the other hand, Chapter 13 can be a good choice if you want to keep your car and can afford to make payments.

Get Legal Help in Understanding Bankruptcy and Car Loans

Dealing with car loans and bankruptcy can be overwhelming, but you don’t have to go through it alone. Our Portland bankruptcy lawyers at Michael D. O’Brien & Associates, P.C. can help you understand how Chapter 7 and Chapter 13 can help with your car loan and guide you through the process step by step. 

Our bankruptcy law firm can make a significant difference in the outcome of your case and your ability to keep your car. We will help you know your car loan bankruptcy alternatives and help you make the best choices for your financial future. 

We’ll recommend the best strategy to help you get back on solid ground. We are here to guide you every step of the way, offering clear solutions tailored to your needs. Take the first step towards financial freedom. Contact us now to schedule a free consultation, and let us help you find the best path forward.