Car Loans During Bankruptcy
A bankruptcy car loan situation can go several ways depending on your chapter and whether you want to keep or surrender the vehicle:
- Keep and reaffirm: Sign a reaffirmation agreement to keep the car and continue payments on original terms
- Keep and cramdown (Ch. 13): Reduce the loan balance to the car's current value if you have owned it 910+ days
- Surrender: Return the car, discharge the deficiency balance, and start fresh
- Redeem (Ch. 7): Pay the car's current value in one lump sum to keep it free and clear
Chapter 13 Car Cramdown
One of Chapter 13's most powerful tools is the car cramdown under 11 U.S.C. Section 506(a). If you purchased your car more than 910 days before filing, you can reduce the loan balance to the car's current fair market value. This can save thousands -- a car worth $12,000 with a $20,000 loan balance becomes a $12,000 claim.
The interest rate on the crammed-down loan is also typically reduced to the Till rate (prime + 1-3%, currently around 6-8%).
Getting a New Car Loan After Bankruptcy
See our detailed guide on auto loans after bankruptcy for timing, rates, and lender options. Key points: start rebuilding credit immediately with a secured card, save for a larger down payment, and get pre-approved from a credit union before visiting dealerships.
Frequently Asked Questions
Can I keep my car if I file bankruptcy?
Yes, in most cases. You can reaffirm the loan, cramdown the loan in Chapter 13, or redeem the car in Chapter 7. Your vehicle exemption protects equity up to your state's limit.
What is a bankruptcy car loan cramdown?
A cramdown reduces your car loan balance to the vehicle's current fair market value in Chapter 13. If you owe $20,000 on a car worth $12,000, the secured claim becomes $12,000. The car must have been purchased 910+ days before filing.
Can I get a car loan during Chapter 13 bankruptcy?
Yes, with court approval. File a motion to incur new debt showing the purchase is necessary and affordable. Courts generally approve necessary vehicle purchases.
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