Bankruptcy laws can be a bit complicated and sometimes it’s not clear to bankruptcy filers what can and cannot be discharged if they decide to file Chapter 7 or Chapter 13 bankruptcy. Recently on our legal forum a user asked, “If I decide to file bankruptcy will my car payments be discharged?”
Filing Chapter 7 bankruptcy and Car Payments
If you file Chapter 7 bankruptcy certain types of unsecured debts such as medical bills, credit card bills, and unsecured debts may be discharged. Car loans, however, are secured debt, which means they are secured by collateral, which in this case is the car. If you fail to make payments for your car the car will be repossessed by the lender.
If you are behind on car payments the car may be sold and the proceeds from the sale used to repay some of the arrearage. In some cases, however, even if the car is sold there will be outstanding debt, called a deficiency balance which you may be expected to pay.
If you file bankruptcy after your car has been repossessed and sold but there is a deficiency balance, this debt is unsecured debt and may be discharged. In some cases, however, the lender may have placed a lien on your properties using the deficiency judgment. This lien may not automatically be removed in Chapter 7 bankruptcy so you may have to file a motion and ask the court to avoid the lien.
What are your options for saving your car?
If you file Chapter 7 bankruptcy and want to keep your car you have several options: redeem the car for the fair market value or reaffirm the debt on the car and continue to make car payments. If you own your car free and clear you may also be able to keep your car, but whether or not this is an option will depend on your state’s bankruptcy exemption laws.
For instance, if the value of your car is less than the exemption in your state your car will be protected. For example, if you live in Ohio and your car is worth $2,000 because the state’s bankruptcy exemption is $3,450.00, your car is protected. Cars worth more than the exemption are generally sold and the proceeds used to repay the creditors. Talk to a bankruptcy lawyer for more information about your best option.
Filing Chapter 13 bankruptcy and Car Payments
So now we know that the secured car loan will not be discharged by filing Chapter 7 bankruptcy but what about Chapter 13 bankruptcy? Will filing Chapter 13 allow you to discharge any types of secured debts? Unfortunately, no, in fact Chapter 13 will not even allow you to immediately discharge unsecured debts.
If you file Chapter 13 bankruptcy you will have to create a three or five year debt repayment plan to repay your secured debts and your unsecured debts. Some unsecured debts will be discharged at the end of the debt repayment period if you have not completely repaid them, but secured debts, such as a car payment, will remain as long as you own your car. Failure to make secure debt payments according to the scheduled debt repayment plan may allow the lender to repossess the asset.
For instance, car payments which have not been paid for several months may be included in your debt repayment plan and paid out over time, but if you fail to make your current monthly car payment the lender can repossess your car.
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