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Car Loan Bankruptcy - Bankruptcy: What Happens to Car Loans?

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The decision to file bankruptcy is not an easy one to make. There many things to consider because bankruptcy affects many areas of the person’s life. One of the key questions is which debts can and will be discharged and which will not. Another question is how to rebuild credit after bankruptcy.

Many individuals end up in a tough situation if they are filing for bankruptcy and have a car loan. Should it be included or reaffirmed? It depends on each individual case. Is this the only car he or she has? Can the person afford to make payments on it after bankruptcy? Is the value of the vehicle less than what is owed for it? May the vehicle need costly repairs soon? The individual needs to decrease the expenses to get back on track. Keeping a vehicle with high monthly payments or in need of repairs increases the chances that he or she will fall behind. What are the options when it comes to car loan and bankruptcy?

The individual may include the car loan in bankruptcy and turn in the vehicle to the bank. In this case the lender will sell the vehicle at an auction. Usually the amount is lower than what is owed for it. The balanced, called deficiency balance, will be discharged in bankruptcy. This may pose some problems. If this is the only vehicle the person owns, he or she must find another car to get around. No lender will do a loan while the bankruptcy case is still open. The individual can wait until the debts are discharged and obtain financing later. He or she may get a very inexpensive vehicle to drive until then.

Another option is to keep the vehicle and to reaffirm the loan. What this means is the individual will continue to make payments to the lending institution as agreed on the original contract. However, if the person falls behind, the loan can no longer be included in bankruptcy. The car can be repossessed and sold. The person can be sued for the deficiency balance if there is any. This is a good way to start rebuilding credit history. However, not all lenders report reaffirmed loans to credit bureaus. The person may need to check with the lender if they do.

If the amount of the loan is more than the fair market value, the loan can be reduced to this amount. The difference will be eliminated and there will be a new car loan after bankruptcy discharge. However, there is a rule that the car has to be owned at least 30 months prior to filing. But not many lenders are following this rule and may refinance the car even if it was purchased a day before filing. The original lender may object to this but it is worth a try.

Getting a car loan after bankruptcy has been discharged can be tricky because not many lenders want to issue loans to people with a recent bankruptcy on their credit report. If they do, the interest rate is very likely to be high but this is the only way to start improving the credit. Loan counselors recommend taking the loan even if the rate is high, making payments for at least a year and then refinancing under more favorable terms. It is recommended to make a big down payment and look for a loan that does not have a prepayment penalty. Paying the loan off sooner will not only bring savings on interest charges but also help bring up the credit score.

Options vary when it comes to ca loans in bankruptcy filing. The decision has to be made by the individual with the advice of an experienced legal counselor.

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