A car loan is a secured debt, which means that the car itself is used as collateral in the event you default on the loan. The lender maintains the right to repossess the car if your default. However, if you can make up the missed payments on the car, like in a Chapter 13 case, you will be able to keep the car.
This leaves many people to believe that they can automatically keep their car in bankruptcy, which isn’t always the case depending on the type of bankruptcy case you file. Secured debts become more complicated to manage in a Chapter 7 case, because most of the debts are not being repaid, but rather liquidated. However, this does not mean that your car will automatically be repossessed in a Chapter 7 bankruptcy.
Bankruptcy laws provide a few ways to manage your car loan in a Chapter 7 case. First, you may be eligible to keep your vehicle by redeeming your loan balance. In this scenario you would be able to get a new loan for the value of the car. For example, if your car loan is for $15,000 but the car is only worth $10,000; you could obtain a loan for the $10,000 and the remaining $5,000 would be eliminated.
Another way to potentially keep your car in a Chapter 7 case would be to file for reaffirmation. A reaffirmation gives you the legal right to exclude the car loan debt from your case and arrange to continue making payments on the loan. As long as your payments continue until the loan is paid in full, you will be able to keep the car and the lender cannot repossess the vehicle.