Chapter 7 bankruptcy and Chapter 13 are the most popular forms of personal bankruptcy, and either can address problems with automobile loans. People comfortable with losing their car to repossession generally choose Chapter 7 if they qualify, while people looking to keep their automobile often choose Chapter 13. However, all debts are listed in bankruptcy. It is illegal to hide other debts while declaring bankruptcy because of a car loan.
Effects
The Federal Trade Commission recommends people avoid bankruptcy if possible. Bankruptcy is the most extreme form of debt management and it ruins credit over the short term. Bankruptcy information remains on credit reports for a minimum of 10 years, making it difficult or impossible to receive favorable interest rates on loans for a while. Most people need two to three years after bankruptcy to fully restore their credit.
Reposession
A person whose credit is fine except for delinquent car payments should seek alternatives to bankruptcy, including repossession, if necessary. Repossession also hurts credit, but remains on credit reports for only seven years. It is also possible to maintain other current forms of credit after a repossession, such as credit cards. Filing for bankruptcy could prompt credit card companies and other lenders to close credit lines if they spot the bankruptcy filing on credit reports. Filing for bankruptcy stops repossession, but only temporarily. Within a month or two, the bankruptcy court will allow repossession if the person cannot afford the payments.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy usually lasts only three or four months. Chapter 7 is often selected by people who lose their car to repossession but still owe money on the loan. Lenders sell repossessed cars at auctions or private sales, with proceeds applied to the loan balance. Often, there is a remaining balance because the car is worth less than the amount on the loan. The borrower can make payment arrangements or file for bankruptcy to avoid possible bank or wage garnishment if the bank files a lawsuit to collect. Chapter 7 eliminates repossession debt and other unsecured debt such as credit cards. In some cases assets are sold to pay creditors, but many people avoid losing anything because of rulings called exemptions. Exemptions protect assets such as a primary residence and household goods. Chapter 7 moves fast after exemptions are noted, with repossession and other unsecured debt completely wiped out at the end of the process. Generally, only people with low incomes qualify for Chapter 7 because of state guidelines.
Chapter 13
People who cannot qualify for Chapter 7 can select Chapter 13. Chapter 13 allows keeping a car through bankruptcy. Missed payments are listed along with other debts in a mandatory payment plan lasting three to five years. The borrower can then enter into an agreement with the lender to keep the car during the bankruptcy, but must make all payments on time. The lender can proceed with repossession if the borrower misses payments in bankruptcy. The bankruptcy court allows the debtor to make car payments directly to the lender during Chapter 13, with other creditors, such as credit card companies, paid thorough the court-monitored payment plan.
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