4 Ways to Deal with an Auto Loan During Chapter 7 Bankruptcy Skip to main content

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4 Ways to Deal with an Auto Loan During Chapter 7 Bankruptcy


Auto loans

Auto loans and bankruptcy

Image Source: Flickr User davidd

If you have an auto loan and are considering Chapter 7 bankruptcy to deal with insurmountable debts, there are several outcomes for your vehicle. These depend on your circumstances, the value of your vehicle, your loan balance, and whether or not you are current on your auto loan payments. Here are the four options that are potentially available to you to help deal with your auto loan.

#1 Surrender the Vehicle

There are a few circumstances under which you may want to consider surrendering your vehicle back to the lender and allowing the remaining balance of the loan to be discharged in Chapter 7. If your car is worth far less than the loan value, it may not be worth it to keep the car. Alternately, if your car is falling apart and needs major repairs such that you have no value in the vehicle, you may want to let it go. If you are too far behind to catch up on payments even after other debts are discharged through Chapter 7, that’s another reason to consider letting that car go, and making other transportation arrangements.

#2 Redeem the Vehicle Loan

Loan redemption is the option where you “redeem” your loan by paying the lender less than the balance owed that’s equal to the fair market value of the vehicle. This only works if you pay the redemption amount as a lump sum. You will not be able to get your loan balance lowered to this amount – you will have to essentially buy out your loan with cash for the lower value. In rare cases, you may be able to find a lender to let you borrow the fair market value to redeem the loan. What’s more likely is that you might be able to borrow funds from your family to redeem it. This is the least-used option.

#3 Reaffirm the Auto Loan

Reaffirmation of your loan is the most common option chosen by consumers in Chapter 7 bankruptcy. If you are current on your payments, your auto lender may automatically send a reaffirmation agreement to your bankruptcy attorney or will send one on request. The terms of your loan will remain the same including the remaining balance and interest rate, and this keeps the auto loan out of the bankruptcy. However, if you don’t keep up with the payments, the lender will repossess and can pursue you for the remaining balance on the loan after the vehicle is auctioned, so it’s a serious step.

#4 Keep the Vehicle and Keep Paying

Most auto lenders will allow you to keep on with your auto payments without a reaffirmation agreement. Some lenders don’t want to go through reaffirmation and will let you keep your vehicle so long as you keep paying your notes on time. It’s risk-free, in a way, for the lender to let you keep it and try because they can always repossess it. If you default, they can take and sell it at auction the same as they can if they don’t allow you to keep or reaffirm the loan. The letter of the bankruptcy law allows for only redemption, surrender or reaffirmation, but many lenders will let you move forward this way instead.

If you need help getting a fresh financial start because you’re overwhelmed with debt, living paycheck to paycheck and under stress from debt collectors, we can help. Call +1-919-646-2654 for a free North Carolina bankruptcy consultation with the bankruptcy experts of the Law Offices of John T. Orcutt. We offer appointments in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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