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Auto Loans and Bankruptcy: 5 Things to Consider

[May 27, 2009.]

 

You're having financial problems and are considering filing bankruptcy. Does filing bankruptcy mean you get to keep your car? Is there anything you can do to work out an auto loan besides filing bankruptcy?  If have an auto loan, here are some things to consider before filing bankruptcy.

An auto loan is a secured loan: This means that your car is the security, also called collateral, for the loan. This is where the repo man comes in; if you don't make payments, your auto loan company can repossess your ride. Filing bankruptcy doesn't mean you get to keep your car without making payments.


  • Payments must be made if you want to keep your car: If you're filing Chapter 13 bankruptcy and have taken out a car loan within 910 days of filing bankruptcy, you will have to repay the entire loan amount, regardless of your car's current value, if you want to keep your car.  If you're filing a Chapter 7 bankruptcy, you'll be required to repay the retail replacement value of your car.

  • Consider surrendering your car: Consider surrendering your car if you cannot make payments, or work out arrangements. This decision should not be made lightly, as you will lose any equity you may have in your car, but the credit consequences won't be as bad as they are for bankruptcy.

  • Call your auto loan company to discuss repayment arrangements: Depending on your circumstances, your auto loan lender may be willing to postpone payments for a period of several months. Usually this involves adding unpaid interest to your loan and changing the payment due date. Some US auto companies have been advertising their willingness to assist customers who've recently bought cars and subsequently suffered hardship. If you need temporary help, ask your auto loan company about a repayment plan or other workout arrangements. 

  • Asking for help from family: This can be difficult, but may help in avoiding bankruptcy. Determine how much money is needed, and approach family members with a specific amount and repayment plan. "Dad, I need to borrow $2000, and I can repay $200 a month when I get my first pay check, which will be on the 10th of this month." Borrowing money from family and friends may not be feasible,  but they may think of ways to help even if they can't lend any money.

  • Bankruptcy stays on credit reports for up to 10 years: Although filing bankruptcy is a legal form of debt relief, the consequences are severe. Bankruptcy appears on credit reports for 7 to 10 years. It's possible to be denied credit, employment, and insurance due to bad credit, and nothing causes bad credit faster than filing bankruptcy.


Take time to explore all options before filing bankruptcy, but beware of fast loan schemes and unsolicited offers of "help."

 

About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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