Many people in New Jersey turn to Chapter 7 bankruptcy when they face overwhelming debt and need a way to reset their finances. This type of bankruptcy can eliminate unsecured debts such as credit cards and medical bills, giving filers a clean slate.
However, a car loan works differently because it’s a secured debt. Whether you can keep your car after filing depends on several factors.
The impact of Chapter 7 on your car loan
Once you file for Chapter 7 bankruptcy, an automatic stay immediately takes effect. This stay temporarily prevents lenders from repossessing your vehicle or pursuing collection actions. However, the protection does not last forever. Once the bankruptcy case ends, the lender can move forward based on your decision regarding the loan.
Borrowers generally have three choices: reaffirmation, redemption, or surrender. Reaffirmation means you agree in writing to continue paying the loan under its original terms. This allows you to keep the car, but you remain responsible for the debt even after bankruptcy.
Redemption allows you to pay the current fair market value of the vehicle in a single lump sum, which may benefit borrowers who owe more than the car is worth. Surrendering the car means giving it back to the lender, which cancels the debt and ends your responsibility for future payments.
Ways to keep your vehicle in a Chapter 7 case
New Jersey filers may use either federal or state exemptions to protect their property, including vehicles. If the equity in your car falls below the available exemption amount, you can usually keep it. Equity is the difference between the car’s value and the amount you owe on the loan. If the equity is too high, the bankruptcy trustee may sell the car to repay creditors, although you would have the right to receive the exempt portion.
Lenders also consider payment history. If you stay current on your loan and the car’s value doesn’t exceed exemption limits by a large amount, many lenders will allow you to keep the vehicle. On the other hand, if you fall behind, repossession becomes a real possibility, even during bankruptcy.
Understanding how Chapter 7 bankruptcy interacts with car loans empowers you to make more informed financial decisions and avoid unexpected outcomes. This knowledge helps you protect your property and plan responsibly for the future.
