How Bankruptcy Affects Car Loans and Leases in Indiana

Bankruptcy can be a complex process, especially when it comes to financial commitments like car loans and leases. If you live in Indiana and are considering filing for bankruptcy, understanding its implications on your vehicle is crucial.

In Indiana, there are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. Each type has distinct effects on car loans and leases.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often termed 'liquidation bankruptcy'. This means that, while many of your unsecured debts (like credit card debts) can be discharged, secured debts (especially car loans) are treated differently.

When you file for Chapter 7, creditors may seize your car if you default on the loan and fail to maintain payments. However, if you're current on your payments and wish to keep your vehicle, Indiana law allows you to claim a vehicle exemption, which can protect your car from being sold to pay off debts.

It's important to note that if you choose to reaffirm the car loan during the bankruptcy process, you can retain the vehicle while continuing to make payments. However, if you decide against reaffirmation, the lender can reclaim the car post-bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, on the other hand, is designed for individuals with a regular income who wish to reorganize their debts. This method allows you to keep your car even if you are behind on payments.

Under Chapter 13, you can include your car loan in your repayment plan, enabling you to catch up on missed payments over a period of three to five years. This offers a significant advantage compared to Chapter 7, as it allows you to keep your vehicle while working towards stabilizing your financial situation.

Additionally, if your car loan's interest rate is high, Chapter 13 can allow you to reduce the interest rate or even lower the principal balance, depending on the vehicle's value and the repayment plan's conditions.

Impact on Leases

Leases are treated differently under bankruptcy law. If you are leasing a vehicle, you have options in both Chapter 7 and Chapter 13 bankruptcies.

In Chapter 7, you can choose to either return the leased vehicle or assume the lease if you wish to keep it. If you decide to keep the leased vehicle, you must continue to make your lease payments to avoid repossession.

In a Chapter 13 bankruptcy, if you're behind on your leased vehicle payments, you can catch up on overdue payments through your repayment plan, similar to a car loan. This way, you can avoid returning the vehicle as long as you stay compliant with your plan.

Conclusion

Understanding the impact of bankruptcy on car loans and leases in Indiana can help you make informed decisions during financial difficulties. Whether you're considering Chapter 7 or Chapter 13, it’s essential to assess your situation carefully and explore options with a bankruptcy attorney. This can help protect your vehicle and pave the way towards financial recovery.