Attorney at Debt Advisors Law Offices
Practice Areas: Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, Stop Foreclosure
Filing for bankruptcy can be challenging. This is especially true if you’re concerned about what will happen to your assets, like your car. For many Wisconsin residents, a car is essential for daily life—whether for commuting, family errands, or other personal needs. If you’re worried about how bankruptcy might affect your car loan, this guide will help you understand your options, whether you file for Chapter 7 or Chapter 13 bankruptcy.
At Debt Advisors Law Offices, we provide clients across Wisconsin with clear, straightforward information about bankruptcy. We’ll explain what happens to your car loan in bankruptcy and what options may help you keep your vehicle while finding financial relief.
Not all debts are handled the same way in bankruptcy. A car loan is typically a secured debt backed by collateral (the car itself). If you don’t keep up with your loan payments, the lender has the right to repossess the vehicle.
However, bankruptcy laws offer potential solutions to keep your car or alleviate its debt burden.
In the U.S., most individuals file for either Chapter 7 or Chapter 13 bankruptcy. Each type has unique impacts on secured debts, including car loans. Here’s a closer look at what each type means for your car loan.
Chapter 7 bankruptcy is often called “liquidation.” It involves selling non-exempt assets to pay creditors. While this can be daunting, it doesn’t have to mean losing your car. In Chapter 7, you have three primary options:
You may reaffirm the loan if you want to keep your car and can continue making payments. This means you sign a new agreement with your lender to continue paying off the car, and the debt won’t be discharged in bankruptcy.
A redemption option allows you to pay the lender the current market value of the car rather than the entire balance owed. This can be helpful if your loan balance exceeds the car’s actual value.
Redemption requires a lump sum payment. This may be feasible if you can access cash or obtain a redemption loan.
“Under 11 U.S. Code § 722, debtors may redeem personal property from secured liens by paying the fair market value, a beneficial option for many Wisconsin residents with high-interest car loans.”
If keeping the car doesn’t make financial sense, you can surrender it to the lender. By doing this, you give up ownership. The debt associated with the car loan is discharged as part of the bankruptcy.
This option can be beneficial if the car payments are too burdensome or the vehicle is worth significantly less than the loan balance.
“Wisconsin bankruptcy exemptions allow debtors to protect up to $4,000 of vehicle equity, helping many residents retain essential transportation.”
Chapter 13, also known as “reorganization” bankruptcy, works differently. Rather than liquidating assets, Chapter 13 allows you to set up a repayment plan over three to five years.
This plan often includes provisions for secured debts like car loans, making managing these payments easier.
One advantage of Chapter 13 bankruptcy is that it allows you to include your car loan in the repayment plan. This allows you to spread out your car payments over the bankruptcy term, making them more manageable.
The monthly payments may be lower, and you can benefit from reduced interest rates.
If you’ve had your car loan for over 910 days (about two and a half years), Chapter 13 bankruptcy allows for a cramdown.
This involves reducing the loan balance to the car’s market value and lowering the total amount owed. This is especially helpful if your vehicle is worth significantly less than what you owe.
| Option | Chapter 7 Bankruptcy | Chapter 13 Bankruptcy |
| Reaffirmation | Keep the car and continue payments | N/A |
| Redemption | Pay the car’s market value as a lump sum | N/A |
| Surrender | Return the car and discharge the debt | Return the car, but may be part of repayment plan |
| Loan Restructure | N/A | Include car payments in the 3-5 year repayment plan |
| Cramdown | N/A | Reduce loan to car’s market value if loan is over 910 days |
Bankruptcy often comes with misconceptions that can cause unnecessary stress. Here are some common myths about car loans in bankruptcy—and the reality behind them:
Reality: While bankruptcy can affect your car loan, it doesn’t mean you’ll automatically lose your vehicle. If that’s the best solution, options like reaffirmation, redemption, and restructuring in Chapter 13 can help you keep your car.
Reality: Bankruptcy doesn’t simply erase secured debt. Options like surrendering the car can discharge the debt, but you lose ownership in exchange. Chapter 13’s repayment plan can help you keep your car, but the debt won’t disappear entirely.
“Nationally, nearly 65% of personal bankruptcy filers have secured loans, such as car loans, underscoring the need to understand options for car ownership.”
You won’t automatically lose your car if you file for bankruptcy in Wisconsin. Chapter 7 and Chapter 13 each offer different options, including reaffirming the loan, redeeming the vehicle, or surrendering it.
Yes, in many cases. If you can reaffirm the loan or redeem the car, you may keep it—if you manage the payments or the redemption cost.
Chapter 13 allows you to include car loan payments in a structured repayment plan. This makes payments more manageable and reduces the balance if the car loan is eligible for a cramdown.
Not necessarily. Bankruptcy can help manage your car loan debt, but secured loans like car loans have different options. The car loan might be discharged if you surrender the car, or it can be restructured if you choose a repayment plan in Chapter 13.
Yes. Wisconsin’s bankruptcy exemption laws can protect up to $4,000 of vehicle equity. This may allow you to retain your car, depending on the loan balance and value of the vehicle.
Filing for bankruptcy can offer relief from overwhelming debt. That said, understanding what happens to a secured loan, such as a car loan, is crucial for making the best decision in your circumstances. Chapter 7 and Chapter 13 each provide unique paths, from keeping the car and reaffirming the loan to restructuring payments or surrendering the vehicle.
If you’re a Wisconsin resident facing bankruptcy and concerned about your car loan, guidance from a knowledgeable bankruptcy attorney can help you make an informed choice.
At Debt Advisors Law Offices, we understand the impact of bankruptcy on all aspects of life, including essential assets like your car. We’re here to offer insights, discuss your options, and support you in finding a financial solution that works for you.
If you need help with the right path forward, consulting with an experienced attorney can clarify and help you navigate your car loan options in bankruptcy.
Learn about bankruptcy protections, types of bankruptcy, how to get started, what to expect, and who to trust. Filing bankruptcy is the ONLY way to completely eliminate debt. If bankruptcy is right for you, it offers powerful protections that cannot be achieved through alternative solutions such as hardship relief, loans, or debt settlement.
