Bankruptcy and Car Loans
Understanding how a car lien affects your bankruptcy case is necessary for making informed decisions about your car and finances. Will your loan be dischargeable along with other debt? Let’s look into this together.
Overall, vehicle debt has increased by 76.0% between Q3 2014 ($934 billion) and Q3 2024 ($1.644 trillion), according to the Federal Reserve Bank of New York. [1]
When filing for bankruptcy, the way your car lien is handled depends on the type of bankruptcy you file.
Car Liens in Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, the goal is to discharge as much unsecured debt as possible, but secured debts like car loans are treated differently. [2]
- Can Car Liens Be Discharged?
Generally, car loans are secured debts, so the lien will not be discharged in Chapter 7. This means you must continue making payments or risk losing the vehicle through repossession. - Redeeming the Car
If you want to keep the car but owe more than its current market value, you might consider “redeeming” the car. This process involves paying the lender the car’s current value in a lump sum (instead of the full loan amount). It’s not always possible, but it may be an option if you can afford it. - Surrendering the Car
If you can no longer afford the car, you may choose to surrender it. This means giving the vehicle back to the lender, and it will be sold to satisfy the debt. However, surrendering the car won’t necessarily discharge any deficiency balance (the remaining loan amount after the sale), and the lender may seek to collect that balance through other means.
Car Liens in Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows you to keep your car and reorganize your debts into an affordable repayment plan, typically lasting 3 to 5 years. [3]
- Reducing the Loan Amount (Lien Strip)
One of the benefits of Chapter 13 is the possibility of reducing the amount owed on the car loan. If the vehicle is worth less than the loan balance, you might be able to “strip” the lien down to the vehicle’s current market value. This means you only repay the reduced amount through your bankruptcy plan, and the remaining balance is discharged at the end of the plan. - Arrears and Repayment
If you’re behind on car payments but want to keep the car, Chapter 13 allows you to catch up on missed payments over the course of the plan. This is known as curing the arrears, and the balance will be spread out over the repayment period. However, you must continue making your regular payments to the lender as well. - What Happens if You Can’t Keep the Car?
If you’re unable to continue making payments or if the car is not worth enough to justify keeping it, you may surrender the vehicle through Chapter 13. The car will be repossessed, and any remaining deficiency balance could potentially be discharged.
What Happens If You Can’t Pay Off a Car Loan in Bankruptcy?
If you’re unable to pay off your car loan during or after bankruptcy, the consequences will depend on the type of bankruptcy and the situation.
- Repossession
If you can’t keep up with the car payments, the lender has the right to repossess the vehicle. In Chapter 7, if you don’t reaffirm the loan or redeem the car, the lender can repossess it. In Chapter 13, while you may be able to catch up on missed payments, if you fail to make the necessary payments under your repayment plan, the lender could also repossess the vehicle. - Deficiency Balance
If the car is repossessed and sold, there may still be an outstanding balance (known as a deficiency balance) if the sale price is less than what you owe. In Chapter 7, you might still be responsible for this balance, but in Chapter 13, the deficiency balance could potentially be discharged or included in your repayment plan, depending on your circumstances. - Impact on Credit
Whether you surrender the vehicle, have it repossessed, or fail to catch up on payments, the unpaid car loan can significantly impact your credit score. It can remain on your credit report for up to seven years, making it difficult to obtain new credit or loans in the future.
Should You Keep or Surrender Your Car During Bankruptcy?
Deciding whether to keep or surrender your car during bankruptcy is a critical decision that depends on your personal financial situation. Here are some factors to consider:
- Car Value vs. Loan Balance
If the car’s market value is lower than what you owe on it, keeping it might not be financially viable. In Chapter 13, you may reduce the loan balance to the car’s current value, which could make keeping the car a more manageable option. - Equity in the Car
If you have equity in the car (meaning it’s worth more than you owe), Chapter 7 might force you to surrender it unless you can “buy back” the equity through the bankruptcy process. In Chapter 13, you may be able to keep the car and pay off the equity through your repayment plan. - Necessity of the Car
If you rely on your car for work, medical needs, or family obligations, keeping it may be necessary. However, if the car is a luxury or no longer necessary, surrendering it might be a practical way to eliminate the debt and lower monthly expenses. - Loan Terms and Interest Rates
If your car loan has high-interest rates or unfavorable terms, it may be worth surrendering the car and using the bankruptcy process to discharge that debt. On the other hand, if you have a manageable loan with reasonable terms, it might be easier to keep the car and continue payments under bankruptcy.
If you are looking for bankruptcy help and want to discuss how your car loan will be affected, contact Frego & Associates for a free consultation.
Sources:
[1] Davis, M. (2025, January 23). Average car payment and auto loan statistics: 2025. LendingTree. https://www.lendingtree.com/auto/debt-statistics/
[2] Chapter 7 – Bankruptcy Basics. (n.d.). United States Courts. https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
[3] Chapter 13 – Bankruptcy Basics. (n.d.-c). United States Courts. https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
