The Impact of Bankruptcy on Auto Loans in Michigan

Bankruptcy in Michigan can cause significant changes to many aspects of personal finances, including auto loans. For individuals struggling to manage monthly payments, a bankruptcy filing can create both challenges and opportunities. Depending on the specific chapter filed—Chapter 7 or Chapter 13—the outcome for an auto loan may vary widely. 

Some people can keep their vehicle by restructuring or reaffirming the debt, while others decide to surrender the car if the payments are unmanageable. The nuances involved often lead to questions about creditor rights, potential vehicle repossessions, and the impact on a filer’s general financial stability.

What Happens to Your Car Loan in Bankruptcy?

An auto loan is classified as a secured debt. Lenders hold a security interest in the vehicle until the debt is fully repaid. When a bankruptcy is filed, the automatic stay goes into effect, temporarily preventing creditors from pursuing repossession. However, this protection is not absolute. Once the court addresses the debt through the bankruptcy process, the lender may still have rights to the vehicle, depending on the path chosen by the debtor:

• Secured vs. Unsecured Debt: A car loan is nearly always a secured obligation. The vehicle functions as collateral, giving the lender the right to repossess it if payments are not made. Unsecured debts, like credit card balances or medical bills, do not attach to specific property, so they are easier to discharge in bankruptcy.
• Reaffirmation, Redemption, or Surrender: A filer in Chapter 7 typically has three routes to address a car loan. Reaffirming means signing an agreement to remain liable for the loan despite the bankruptcy. Redemption allows you to pay the lender the value of the vehicle in a lump sum payment. Surrender means giving up the car and having the debt discharged.
• Michigan’s Exemptions for Vehicles: State and federal laws provide exemptions that protect certain amounts of equity in a vehicle. Debtors in Michigan can choose either the state exemption system or the federal exemption system. However, most people pick the one that offers the greatest protection for their assets.

Determining the best option depends on whether the debtor wants to keep the vehicle, how much equity the car holds, and the amount still owed. Some may decide their car is worth too little or the loan payments are too high, prompting them to surrender it and eliminate that debt. Others prefer to keep their vehicle at all costs, which can lead them to reaffirm or redeem, depending on their financial circumstances.

Keeping Your Car After Filing for Bankruptcy

Staying on the road can be vital for commuting to work, caring for family members, and managing day-to-day errands. The bankruptcy code provides methods for retaining a primary vehicle, but the specific approach varies depending on whether a filer chooses Chapter 7 or Chapter 13.

In Chapter 7, Michigan filers can use the state’s vehicle exemption under MCL § 600.5451, which allows them to protect a certain amount of equity in one vehicle. If the debtor’s equity does not exceed the allowed amount, the trustee is unlikely to sell the car. If there is more equity than the exemption covers, the debtor might need to pay the difference or risk losing the vehicle.

Chapter 13 is structured differently. Rather than requiring the liquidation of assets to pay off creditors, it sets up a repayment plan over three to five years. Individuals can include car payments in that plan, often lowering monthly costs or catching up on missed payments. The court supervises this process, and as long as the filer complies with all terms, the vehicle is generally safe from repossession.

Reaffirming or Surrendering a Vehicle Loan

After filing under Chapter 7, the trustee and creditors examine the debtor’s assets and liabilities. At that point, a filer may be prompted to either reaffirm or surrender the car loan. Redemption is also an option, although it is less common due to the need for a significant lump-sum payment.

There are important considerations when evaluating each path:

• Reaffirming a Loan: By reaffirming, the debtor signs a new agreement stating they will continue making payments on the vehicle loan. The debt is not discharged in bankruptcy, so if payments are missed in the future, the lender can repossess the car and potentially pursue a deficiency balance. This choice makes sense for individuals with sufficient income to keep up with the loan and who wish to retain a vehicle that holds personal or practical importance.
• Consequences of Surrendering a Vehicle: Some debtors opt to return the car to the lender. By surrendering the vehicle, the debt tied to it is typically wiped out through the Chapter 7 discharge. This debt discharge can be beneficial if the car is worth less than the outstanding loan or if payments are unaffordable. The downside is that the individual no longer has access to that vehicle, which may create logistical issues for work or family obligations.

Redemption is another possibility. It involves paying the lender the fair market value of the car in a one-time payment. If the vehicle is worth substantially less than the balance owed on the loan, redemption can save money. However, acquiring the necessary lump sum is often difficult, especially for filers already in dire financial straits.

Michigan Laws Governing Car Loan and Bankruptcy

State laws in Michigan set guidelines that intersect with federal bankruptcy provisions. Two key statutes, MCL § 600.5451 and MCL § 440.9609 are especially relevant to filers concerned about keeping their car and understanding how repossession operates:

• MCL § 600.5451 – Bankruptcy Exemptions for Vehicles: This law outlines the amount of equity in a vehicle a debtor can protect during bankruptcy. The dollar figure can change periodically, so it is wise to review the current limit or consult an attorney to confirm the most up-to-date exemption. If the equity in the vehicle does not exceed the exemption, it is often safe from liquidation.
• MCL § 440.9609 – Repossession Laws and Creditor Rights: When a borrower defaults on a secured debt, creditors have certain rights to repossess the collateral, provided they do so without breaching the peace. Filing a bankruptcy petition triggers the automatic stay, halting any active repossession. However, if the debtor chooses not to reaffirm or keep up with payments, the creditor can eventually reclaim the car.

When to Consult a Bankruptcy Attorney

Facing the possibility of losing a vehicle can create enormous stress, particularly for those in Michigan’s rural areas or those lacking reliable public transportation. Speaking to an experienced bankruptcy attorney can clarify how exemptions apply, what repayment options might exist, and how best to negotiate with lenders.

Scenarios where legal guidance is recommended include:

• Understanding All Options Before Making Financial Decisions: A rash decision, such as immediately surrendering a vehicle without exploring the feasibility of reaffirmation or redemption, can have long-term consequences. An attorney can lay out all available routes and help decide which is most beneficial.
• Protecting Assets and Reducing Debt Burdens: Bankruptcy attorneys routinely handle exemption planning, meaning they know how to maximize the value protected during a Chapter 7 or Chapter 13 filing. This act can make the difference between keeping a crucial asset and losing it.
• Assessing Feasibility of Chapter 13: Some individuals qualify for Chapter 13 but might be uncertain about whether it is the better solution compared to Chapter 7. A lawyer can review income, expenses, and outstanding debts to create a workable repayment plan that includes the auto loan.

Contact Sigal Law Firm for Bankruptcy Assistance

Considering bankruptcy often creates fear and uncertainty, especially for those who depend on a vehicle for daily life. When an auto loan is on the line, it is crucial to have dependable information and advocacy. Sigal Law Firm supports clients through each stage of the bankruptcy process, from deciding which chapter to file to negotiating reaffirmation agreements or crafting manageable repayment plans. Whether the goal is to keep a family car, discharge unmanageable debts, or prevent a sudden repossession, informed legal guidance is essential for navigating Michigan’s bankruptcy system effectively.

Call 248-671-6794 for a consultation with Sigal Law Firm.