What will happen to my car loan in bankruptcy?

What will happen to your car loan in bankruptcy law depends on several factors: the amount of the balance due, the type of bankruptcy that you file, and your ability to pay off the loan.

Even though the loan itself may change slightly through bankruptcy, it is likely to remain very much the same as when you first entered the bankruptcy. The advantage of bankruptcy, however, is that it usually results in the reduction of other debts, so that you can afford to make the payments on your secured obligations, like a car loan. If very little is due on your car loan, the simplest approach may be to just try to pay out the note. Other options will depend on the type of bankruptcy that you file.

Car Loans in Chapter 13

Under Chapter 13, debtors must repay the entire car loan if they bought a car within 910 days of the bankruptcy filing. For example, if you had an outstanding balance of $5000 on a car loan whose blue book value was only $3000, you would be required to pay the entire $5000 balance (assuming you want to keep the car) if the car was purchased less than 30 months of filing.

Car Loans in Chapter 7

Cars are also harder to redeem in Chapter 7 cases, since the law now requires paying the lender the retail replacement value of the car. That value is generally higher than the private sale value that was commonly used under prior law. It remains possible for a debtor to surrender a car when keeping up the payments will be impossible.

BAPCPA creates a formal way to assume a personal property lease, such as a car lease, in a Chapter 7 case. The lease will be deemed rejected if the case trustee fails to assume it within 60 days after filing. At that point, the debtor may notify the creditor that the debtor wishes to assume the lease. The creditor may, at its option, notify the debtor that it is willing to have the lease assumed and may condition the assumption on cure of any outstanding default. The debtor then has 30 days after the creditor’s notice to send a further notice that the lease is assumed.

In some districts, an informal “fourth” option (besides redemption, reaffirmation or surrender) has been in use, whereby the debtor simply continues to make loan or lease payments on the original contract terms. BAPCPA purports to abolish this option, and some car lenders have communicated their intention to require debtors to make an election between the three statutory options. Some other car lenders are willing to go along with the fourth option anyway.

The means test for Chapter 7 debtors and the disposable income calculation for above-median Chapter 13 debtors take account of car loans in a peculiar way. In calculating the expense deduction for secured debts, you must add up the payments for the next 60 months and divide by 60 to calculate the deduction. Imagine that you have just 6 more payments to go on a car that’s almost 5 years old. You will be allowed to deduct just one-tenth of your actual monthly payment in figuring out the means test, even though you will probably have to buy a new car within the next few years. A bankruptcy attorney is not, however, allowed to advise you to buy a new car before filing, because Congress has seen fit to forbid “debt relief agencies” from advising someone to incur new debt.