Car Loans in Bankruptcy
Car loans are normally secured debts – if the loans are not paid back, the lender usually has the right to repossess the vehicle because the vehicle itself was pledged as collateral to secure the loan. Secured debts are handled a bit differently if you file bankruptcy and so it pays to understand the intricacies of how bankruptcy might affect a car loan. For starters, while the obligation to pay the debt may be discharged after a successful bankruptcy, the fact that the vehicle itself was pledged as collateral means that the lender can still attempt to repossess the car.
What to Expect if You File Bankruptcy with a Car Loan
There are generally three courses of action when facing bankruptcy with a car loan:
- Stop Payment, Allow Repossession. One option is to cease making payments. Upon your default, it is likely the lender will exercise repossession rights to the vehicle. Once a debtor stops making payments on their car loan, the lender is going to seek to pay the outstanding obligation by seizing the car and selling it. Be wary of this approach, however, because if the car is sold and is not enough to repay the outstanding balance, the lender might still attempt to pursue legal actions against you to satisfy the difference.
- Reaffirm the Debt, Negotiate to Keep Vehicle. In some bankruptcy cases, there is the option to “reaffirm” debts or agree again to pay the debts.
- Offer to Pay the Loan or Buyout the Loan with the Car’s Value
The Importance of Gap Insurance
If your car is totaled for some reason, you could find yourself in a serious financial bind. One of the most unfortunate occurrences that we encounter as bankruptcy attorneys is a circumstance where a client or potential client has their vehicle totaled but either do not have insurance or insurance does not pay out enough to pay off a remaining loan balance. In these cases, the car loan itself is still in place and the lender still expects payments to be made but the car is gone. This creates the perfect storm for a potential bankruptcy. The first thing we always want to know in these cases is whether or not the person had gap insurance. Essentially, gap insurance is a type of car insurance designed to cover the difference between the value of a car and what’s left on the associated car loan. You’ve probably heard that a vehicle taken off the dealership lot begins depreciating immediately after you leave. This usually results in the value of a totaled car being far less than the value due on the outstanding loan. If the car is totaled and the insurance company only pays its fair market value, gap insurance would usually come into play and cover the difference. That’s why its so important to make sure you have gap insurance. Here’s an article covering the basics of gap insurance.
Can You Get Another Car Loan After Bankruptcy?
One thing you should definitely consider if you are filing bankruptcy with a car loan is how filing bankruptcy will impact you if you try to seek financing for a car after bankruptcy. In our opinion, the most important consideration before filing bankruptcy is how you will be able to succeed financially after bankruptcy and your ability to continue making an income is often very reliant on a vehicle for transportation. This is why we often recommend considering reaffirmation of the car loan that you have so you can have no interruption in transportation and can further increase the chances of maintaining an income after bankruptcy.