When you file for bankruptcy, you must list everything that you own and everything that you owe. If you are paying off a car at the time you wish to file for bankruptcy, you will need to need to decide if you are going to surrender the car to the lender or continue making payments on it. Many people wonder “if they file for bankruptcy on one car, do they have to do so with the other?” Listing the cars that you own does not mean that you are going to lose them.
In both chapters of bankruptcy, you can keep anything you own as long as your equity is protected by allowed exemptions. These exemptions are normally generous and most debtors are able to protect all that they own. If you owe money on a car and are filing a Chapter 7, your attorney will prepare a document called a reaffirmation agreement that will be filed with the Court. This “reaffirms” your contract with the lender on your car and must be agreed to by the lender. If your payments have been made on time and if your budget shows that you can afford the payments, the agreement will be approved by the Court and your lender and you will get to keep the car(s).
In a Chapter 13 Bankruptcy, car payments are handled differently than in a Chapter 7. The Trustee normally allows for one payment per adult, so a married couple can have two car payments. The Trustee does not normally allow for a 3rd payment. For instance, if your son or daughter wanted a car, the Trustee wouldn’t allow for a 3rd payment because paying for another car uses up money in your budget that could be paid to your unsecured creditors. Your attorney can explain some of the rare exceptions to this and what some debtors choose to do if they feel strongly about keeping an additional car payment. Your car payments are required to be paid through your plan payment, which goes to the Trustee. The Trustee will then send the payment to your lender. One of the advantages of a Chapter 13 is that the interest rate you have to pay is often much lower that the amount of interest you were paying on your own. Right now, in early 2015, we are using a rate of 3.25%. Of course, that interest rate could fluctuate.
Once you have completed your bankruptcy and are ready to begin with a fresh start, you will be able to finance a car. Lenders know that you are barred by law for a period of time from discharging new debt by filing another bankruptcy, but you will find that lenders who do self-financing will be eager to work with you to sell a car!