What Happens to Your Car Loan When Filing for Bankruptcy

Filing for bankruptcy is not something anyone ever wants to do, but you can keep the experience from becoming an ordeal by understanding the options for your car loan during bankruptcy. When you file bankruptcy, you appear before the court and testify that you are unable to pay for your debt. This typically happens when medical bills stack up or someone in the household loses a job and the resulting decrease in income makes it impossible to continue paying all the payments and obligations you have.

Excluding Car from Bankruptcy

Allowing your car loan to be included in the bankruptcy may be wise if you have no way to afford paying the monthly payment, but if you need your car to get you to and from your job search or to work, it might be a smarter move to reaffirm your debt on the car loan. When you reaffirm your car loan, you are telling the lender that even though you are filing bankruptcy on your other debts, that you still agree to abide by the terms of your car loan and will continue to make payments.

As long as you continue to make the payments as agreed, you will be able to keep the car, which can be critical if it is your only source of transportation.

Negotiate Your Car Loan

If you are very close to having the vehicle paid off, another option you have with your car loan is to negotiate a reduced payoff with the lender. While this may still appear on your credit, it is not nearly as bad as a bankruptcy. Negotiating a payoff with a lender may even make it possible for you to continue making payments on your other debt and avoid bankruptcy altogether.

Reaffirming Your Car in a Bankruptcy

If you do decide to reaffirm the debt on your car loan, your lender will require you to sign reaffirmation paperwork, typically within ten days of the discharge of your bankruptcy. The bankruptcy process can take some time, and many bankruptcy attorneys advise you to stop using your credit cards as soon as you file. If you intend to keep your vehicle, however, you should make it a priority to continue making payments throughout the process. Falling behind on your car loan payments is not a good idea when you are trying to reaffirm the debt and still obtain the title to the vehicle.

As you go through the bankruptcy process and begin to rebuild your credit, be sure to monitor your credit reports closely to make sure that your car loan is not being included in the debts charged off by the bankruptcy and that your lender is still reporting your timely payments of the loan. If there is any discrepancy, contact the lender as well as file a report with the credit reporting agencies disputing the information. Your bankruptcy paperwork can provide the evidence needed to show that the car was not part of the bankruptcy.

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