A charged off car loan is treated in bankruptcy like any other car loan. You need to look beyond the issue of whether the debt is charged off and look at the type of debt it is. The type of debt will determine whether you can get rid of it, or discharge, the debt. How the debt will be treated in bankruptcy will also depend on if you still have the car and want to try to keep it, or if the car has been taken back by the lender and all that is left is the debt from the car loan.
What Is A Charged Off Car Loan In Bankruptcy?
A charged off car loan is either a secured or unsecured debt in bankruptcy. Since you still owe the debt, the debt must be listed in your bankruptcy papers so that you can obtain a discharge of the debt.
In bankruptcy, the “charge off” does not mean anything, other than to tell your lawyer that a payment has not been made on the debt in quite some time. “Charge off” is a term used in accounting that means that the lender has decided that it will not be able to collect the debt from you, so it is no longer carrying the loan as an asset on its books. There are federal rules that require a lender to charge off a car loan when the payments are 120 days late. A charged off debt can still be collected by the lender, and you still owe the debt, it just has to be reported on the lenders books in a different way.
Secured Debt Versus Unsecured Debt
A secured debt is one where you have given your property to secure the loan. Most car loans are secured debt. The lender has put a lien on the title to the car that gives the lender the right to take the car back if you don’t make the payments. If you have a charged off car loan, but you still have possession of the car, or the car title is still in your name (the lender has the car but has not sold it yet), then you have a secured debt. When your bankruptcy schedules are prepared, the property will be listed on Schedule B and the debt will be listed on Schedule D.
If you no longer have possession of the car and the lender has sold it (so the title is no longer in your name), then you have an unsecured debt, or one with no collateral. A lender has the right to collect the difference between what you owed on the loan and the proceeds from the sale of the car. This is called the deficiency balance. The debt will be listed on Schedule F, unsecured debts. The car being taken back by the lender will be shown in the Statement of Financial Affairs.
Secured Debts In Bankruptcy
In a Chapter 7, if the car loan is still secured, then you have to decide if you want to keep the car, or give it back to the creditor. If you want to keep the car, you have to either reaffirm the debt (agree to keep making payments), or redeem the car (pay the value of the car to the lender in a lump sum). You can’t usually reaffirm a debt that is not current, and by definition a charged off debt is not current, so reaffirmation is a rare option.
The more likely options are to either redeem or surrender the car. Redemption makes sense only if the car is worth more than you owe, it is in decent condition, and you have the ability to pay the value of the car in a lump sum. If you redeem the car, the lien on it will be released and any balance left after you pay the value of the car to the lender will be discharged. You would then own the car free and clear after your bankruptcy case is over.
The other option with a secured debt in a Chapter 7 is to surrender the car. You let the creditor take the car back, they will sell it and apply the sale proceeds to the loan, and any amount left owing to the creditor is discharged.
In a Chapter 13, you can pay the loan back over the life of the plan, which allows you to keep the car, even if the debt has been charged off. A Chapter 13 can also help you get a car back that has been repossessed by the creditor. You will likely have to pay the full amount that is owed on the car if you bought it less than two and a half years ago. If you bought the car more than two and a half years ago, you may be able to pay in full only what the car is worth and pay a portion of the rest that is owed.
You can also still surrender a car in Chapter 13. In that case, the car will be sold by the lender and the proceeds applied to the loan. Any leftover balance will be paid a portion over the life of the plan.
Unsecured Debts In Bankruptcy
In a Chapter 7, unsecured debts are generally discharged and you will no longer owe them after your case is over. If a charged off car loan is unsecured, it will be discharged at the end of the case, unless there are extenuating circumstances.
In a Chapter 13, unsecured debts usually receive payment of a portion of the balance owed. This is paid out over the life of the plan. At the end of the case, you will receive a discharge of any remaining amount owed.