How Bankruptcy Affects Your Car Loan in Massachusetts

Filing for bankruptcy can have significant implications for your financial future, particularly when it comes to your car loan. In Massachusetts, understanding how bankruptcy affects your car loan is essential for making informed decisions. This article explores the various scenarios you may encounter and offers insights into managing your car loan during bankruptcy.

When you file for bankruptcy in Massachusetts, there are two main types of bankruptcy you might consider: Chapter 7 and Chapter 13. Each type has different effects on your car loan.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often referred to as liquidation bankruptcy. It allows individuals to have their unsecured debts discharged, but it may also affect secured loans like car loans. If you are current on your car loan payments and want to keep your vehicle, you will often have the option to reaffirm the loan. This means you agree to continue making payments on the car loan despite the bankruptcy filing.

However, if you are behind on your payments or if the car's value is less than your outstanding loan balance, you might consider surrendering the vehicle. In this case, the lender can repossess the car, and you will be relieved of the debt associated with it, although any deficiency balance may be discharged in bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, often referred to as reorganization bankruptcy, allows you to create a repayment plan to pay back your debts over three to five years. This option can be particularly beneficial if you wish to keep your vehicle. With Chapter 13, you have the chance to catch up on past-due payments over the repayment period.

Moreover, if your vehicle was purchased more than 910 days before filing for bankruptcy, you may be eligible for a “cramdown.” This allows you to reduce the amount owed on the car loan to the vehicle’s current market value, which can significantly lower your monthly payments.

Impact on Credit Score

Bankruptcy will inevitably impact your credit score, which in turn affects your ability to secure new loans, including car loans. A Chapter 7 bankruptcy may stay on your credit report for up to ten years, while Chapter 13 can stay for seven years. However, once you’ve completed the bankruptcy process, you could start rebuilding your credit through responsible financial behavior, such as making timely payments on your car loan.

Working with Lenders

After filing for bankruptcy, clear communication with your lender is essential. Most lenders are willing to work with borrowers to find a solution that allows you to keep your car while managing your financial obligations. Keeping your lender informed about your situation can help you negotiate better terms.

Conclusion

Understanding how bankruptcy will affect your car loan in Massachusetts is crucial for making informed choices about your financial future. Whether opting for Chapter 7 or Chapter 13, it's important to consider the implications on your vehicle and overall financial health. Always seek advice from a qualified bankruptcy attorney or financial advisor to navigate the complexities of bankruptcy and its impact on your car loan.