Can I pay off my car loan through bankruptcy?
Many people wonder how filing bankruptcy will affect a car loan at the time of filing. It’s a very natural question and it is important to ensure that you can keep your car after filing bankruptcy. The treatment of your car loan will ultimately depend on which chapter of bankruptcy you file. However, in most cases, you will be allowed to keep the vehicle and make payments on its loan.
This naturally raises the question of how the vehicle loan is paid. Will it be paid directly to your lender or will it be paid during the bankruptcy process? Both options are available depending on the chapter of bankruptcy filed. In a Chapter 7 filing, the loan is usually paid directly to the lender, both during the bankruptcy proceedings and after the discharge. Conversely, in a Chapter 13 bankruptcy you may electively choose to either pay the lender for the car directly, or to have the payments processed by the bankruptcy trustee who will then pay the lender directly themselves.
Each of these options can be beneficial to the person who is filing, and they impact the bankruptcy in different ways. In either case, the car loan will continue during the bankruptcy and the vehicle will be kept by its owner. In certain circumstances, the bankruptcy process can allow a car loan to be paid for less than its face amount. In a Chapter 13 filing a car can be paid off by adding the cost of the loan to the payments made to a trustee who will then make ongoing payments to a lender. If the car loan was taken at least 910 prior to filing bankruptcy, it may be eligible for a “cram-down” which allows the vehicle to pay off based on fair market value instead of the total amount owed. In certain circumstances, you can also reduce interest on the vehicle by doing this!
Fundamentally, the bankruptcy process seeks to provide people with relief from creditors, debt, and the collections process. In most cases, this relief is provided by the bankruptcy discharge which removes any ongoing obligations for the debts that are being resolved. In some cases, such as a car loan where we do not wish to discharge debt, but continue to make payments, the vehicle will be protected, and the loan will remain intact even after the bankruptcy is concluded. Your bankruptcy can be structured so that your vehicle is protected, both during the bankruptcy and after the discharge. This could mean continuing to pay the lender or paying off the vehicle over the course of the Chapter 13 plan.
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