Car loan dispute during bankruptcy: a step-by-step guide



When facing financial difficulties, individuals may find themselves in a situation where they are unable to meet their financial obligations, including car loan payments. In such cases, filing for bankruptcy may be a viable option to seek relief from overwhelming debt. However, a common concern for individuals going through bankruptcy is how their car loan will be affected. This article aims to provide a step-by-step guide on handling car loan disputes during bankruptcy, ensuring a clear understanding of the process and potential outcomes.

Understanding Bankruptcy and Car Loans

Bankruptcy is a legal process that allows individuals or businesses to seek relief from their debts when they are unable to repay them. It provides a fresh start by eliminating or reorganizing debts under the supervision of a bankruptcy court. There are different types of bankruptcy, including Chapter 7 and Chapter 13, each with its own set of rules and requirements.

Car loans, also known as auto loans, are a type of secured debt where the vehicle serves as collateral for the loan. If a borrower defaults on their car loan, the lender has the right to repossess the vehicle to recover their losses. However, when a borrower files for bankruptcy, an automatic stay is put in place, which temporarily halts all collection efforts, including repossession.

Determining the Type of Bankruptcy

The first step in handling a car loan dispute during bankruptcy is to determine the type of bankruptcy being filed. Chapter 7 bankruptcy involves the liquidation of assets to repay debts, while Chapter 13 bankruptcy involves creating a repayment plan to pay off debts over a period of time. The type of bankruptcy will impact how the car loan is handled.

Assessing the Equity in the Vehicle

The next step is to assess the equity in the vehicle. Equity refers to the value of the vehicle minus any outstanding loan balance. In Chapter 7 bankruptcy, if the equity in the vehicle exceeds the allowed exemption amount, the trustee may decide to sell the vehicle to repay creditors. However, if the equity is below the exemption amount, the debtor may be able to keep the vehicle by reaffirming the car loan and continuing to make payments.

In Chapter 13 bankruptcy, the equity in the vehicle is considered as part of the debtor's overall financial situation. The debtor may be required to pay the value of the equity to unsecured creditors as part of the repayment plan. It is important to consult with a bankruptcy attorney to understand the specific rules and exemptions in your jurisdiction.

Reaffirming the Car Loan

Reaffirming the car loan is an option available in Chapter 7 bankruptcy to keep the vehicle. By reaffirming the loan, the debtor agrees to continue making payments on the car loan as if the bankruptcy had not been filed. This allows the debtor to retain ownership of the vehicle and maintain a positive credit history.

It is important to carefully consider the decision to reaffirm a car loan as it may have long-term financial implications. If the debtor is unable to make future payments, they may be held personally liable for any deficiency balance if the vehicle is repossessed and sold.

Redeeming the Vehicle

Redeeming the vehicle is another option available in Chapter 7 bankruptcy. It allows the debtor to pay the lender the fair market value of the vehicle in a lump sum payment, effectively buying back the car. This option can be beneficial if the fair market value of the vehicle is significantly lower than the outstanding loan balance.

However, redeeming the vehicle requires the debtor to have access to a substantial amount of cash to make the lump sum payment. If the debtor is unable to make the payment, other options such as reaffirming the loan or surrendering the vehicle may need to be considered.

Surrendering the Vehicle

If the debtor is unable to afford the car loan payments or no longer wishes to keep the vehicle, surrendering the vehicle is an option. By surrendering the vehicle, the debtor returns the car to the lender, and the remaining loan balance is discharged in bankruptcy. This allows the debtor to eliminate the debt associated with the car loan.

It is important to note that surrendering the vehicle may result in a deficiency balance if the outstanding loan balance exceeds the value of the vehicle. This deficiency balance may still be owed by the debtor even after the bankruptcy is finalized.


Navigating a car loan dispute during bankruptcy can be a complex process, but understanding the steps involved can help individuals make informed decisions. Whether it is reaffirming the car loan, redeeming the vehicle, or surrendering the vehicle, each option has its own implications and consequences. Consulting with a bankruptcy attorney is highly recommended to ensure the best possible outcome and to protect one's rights and interests throughout the process.


  • Q: Can I include my car loan in bankruptcy?

    A: Yes, car loans can be included in bankruptcy. However, the treatment of the car loan will depend on the type of bankruptcy being filed and the equity in the vehicle.

  • Q: Will bankruptcy stop car repossession?

    A: Yes, filing for bankruptcy triggers an automatic stay, which temporarily halts all collection efforts, including car repossession. However, the lender may seek relief from the automatic stay to repossess the vehicle if the debtor is not making car loan payments.

  • Q: Can I keep my car if I file for bankruptcy?

    A: Whether you can keep your car in bankruptcy will depend on various factors, including the type of bankruptcy being filed, the equity in the vehicle, and the debtor's ability to continue making car loan payments.

  • Q: What happens to the car loan after bankruptcy?

    A: The treatment of the car loan after bankruptcy will depend on the decisions made during the bankruptcy process. It could involve reaffirming the loan and continuing to make payments, redeeming the vehicle, or surrendering the vehicle.

11 October 2023
Written by John Roche