Bankruptcy and Car Loans

Where You Need a Lawyer:

(This may not be the same place you live)

At No Cost! 

 How Does Bankruptcy Affect Car Ownership?

Bankruptcy is a legal process that an individual or entity can use to eliminate or to restructure their debt. It is often presented as an option when the individual or entity’s amount of debt exceeds their ability to repay that debt.

The types of assets and property that will be affected by filing for bankruptcy will depend upon the chapter of bankruptcy that the debtor declares. For example, an individual consumer will typically file for a Chapter 7 or a Chapter 13 bankruptcy.

If an individual files a Chapter 7 bankruptcy, they may be required to liquidate their assets in order to pay down their debt. Some of those debts, however, may be canceled, or erased, by a bankruptcy court.

If an individual files a Chapter 13 bankruptcy, they will be granted a grace period. During this period, they will be required to reorganize their finances, generate a payment plan, and repay their debts over a certain period of time. Both of these chapters of bankruptcy will affect the individual’s ownership rights over their motor vehicle.

There may be ways for the debtor to maintain possession of their vehicle under both chapters of bankruptcy. Whether the individual will be permitted to keep their vehicle or not will depend mostly on the circumstances of their bankruptcy filing.

Do You Lose Your Car Title in Bankruptcy?

Many individuals are concerned regarding whether they will lose the title to their motor vehicle if they file for bankruptcy. The title to a motor vehicle is a legal instrument that an individual or an entity may use to prove that they are the owner of the vehicle and, therefore, have ownership rights over the vehicle that is described in the title document.

In the majority of states, the title to a vehicle is usually issued by the Secretary of State or a state’s Department of Motor Vehicles (DMV) and generally contains the following information:

  • The registered name of the owner of the vehicle, including both individual consumers and business organizations;
  • A description of the vehicle that the title is attached to, such as the car make, model, year, history, etc.; and
  • The classification or branding that is associated with the car title, for example, clean, salvage, clear, rebuilt, etc.

Similar to when an individual decides to sell their home or another piece of real property, if the owner of the vehicle decides to trade in or sell their vehicle, they are required to transfer the car title along with the physical vehicle to the new owner. In addition, similar to a mortgage loan on a home or other piece of real property, a lender may place a lien on a vehicle if the individual fails to pay off their debt.

A lender may then seize the individual’s car title until they finish paying off their debt in full. Once their debt is paid off completely, the lender will restore their car title and the individual will regain their full ownership rights.

As noted above, whether or not an individual will lose their car title when filing for bankruptcy will depend largely upon the chapter of bankruptcy that the debtor declares as well as the circumstances that surround the particular bankruptcy case.

In addition, the answer to this question may also vary by state because each state has different laws regarding what categories of property or assets that may be exempted from creditors.

Such regulations are known as state bankruptcy exemptions and serve to protect certain types of property in a bankruptcy proceeding. For example, most states allow a debtor to retain their assets and property in a Chapter 13 bankruptcy case.

This is because the individual is expected to pay off their debts over an extended period of time and in accordance with their Chapter 13 repayment plan. Therefore, even if the individual is behind on making their car payments, they may be able to either request that a car loan be reduced to match their vehicle’s current value or they can pay off the loan in smaller installments, as outlined in their Chapter 13 bankruptcy repayment plan.

How Does Chapter 7 Bankruptcy Affect Car Loans?

On the other hand, this issue may become more complicated when an individual files for Chapter 7 bankruptcy. This is because this type of bankruptcy is used to cancel debts.

In a Chapter 7, an individual is required to disclose each item of property and assets that belong to them during the process of declaring bankruptcy. However, in most states, a bankruptcy exemption is provided for the individual’s motor vehicle.

This means that the bankruptcy court will set aside a certain percentage of equity in the debtor’s vehicle. If the amount of equity that is set aside is found to be equal to the value of the vehicle, the individual will remain in possession of their car.

Although there are certain Chapter 7 bankruptcy cases where the debtor may lose the title to their vehicle, typically, they will not lose physical possession of it. This is especially true in cases where the individual needs their vehicle to get to so in order to collect a paycheck that will allow them to continue paying down their debts.

Another important factor related to car titles in bankruptcy cases is that the amount of equity a debtor will need to set aside will vary based on individual state laws. Generally, however, a vehicle’s blue book value is typically the legal standard followed when appraising the amount that a vehicle is worth.

Can I Get a Car Loan if I Have Filed For Bankruptcy?

It is important to note that, overall, a bankruptcy will have serious long-term consequences for a debtor. Once a bankruptcy is complete, it can be very difficult for an individual to repair their credit and to obtain financing for necessary large purchases after they file for bankruptcy.

It is not impossible for an individual to obtain a loan for a large purchase, such as a car, after filing for bankruptcy. However, this process will take a considerable amount of time.

The individual will have to re-establish their credit by making complete and on-time payments on any of their open accounts. Therefore, choosing an affordable vehicle will be key in demonstrating an individual’s willingness to repair their credit as well as pay back their loan.

Another issue to consider is that, as previously noted, the chapter that is filed may affect the outcome of a car loan. It may seem that a Chapter 13 bankruptcy may be the best option for re-establishing credit faster, because the individual is still paying off some of their debts, as opposed to having them discharged.

In the alternative, a Chapter 7 provides the individual with a clean slate. Because of this, it may be easier for the individual to make timely payments on new debt, such as a car loan.

If an individual filed a Chapter 13 bankruptcy, they would be required to pay back as much as possible in the reorganized payment plan, which may make it difficult for an individual with debts that they could not handle.

If the individual still has trouble making their payments, it may be difficult for them to re-establish new credit. This may lead to a difficult time obtaining a car loan.

Do I Need an Attorney for Assistance with Bankruptcy and Car Loans?

If you are considering filing bankruptcy, or if you have already filed bankruptcy and you need to apply for a car loan, it may be helpful to consult with a bankruptcy attorney. Your attorney can advise you of the options available as well as advise on how to best proceed in your situation.

If you decide bankruptcy is necessary, your lawyer will help you throughout the process and represent you any time you have to appear in court.

Law Library Disclaimer


16 people have successfully posted their cases

Find a Lawyer