What happens to car finance if I go bankrupt
- 18 Feb 2022
If you have car finance you may be able to keep your vehicle if you go bankrupt. However are also other options you can consider.
Included in this article:
- Can you carry on paying for your car?
- Is it possible to hand it back and write off the debt?
- Can you get car finance while you are bankrupt?
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Can you carry on paying for your car finance if you go bankrupt?
Car finance is secured on your vehicle. Secured debts are not included in Bankruptcy so this debt is not automatically written off by the process. It is therefore possible to keep the car if you want to as long as you can afford the monthly payments.
You will need to declare the net value of the car in your application. This is the current second hand value (normally based on a valuation from We Buy Any Car.com) less the total finance outstanding. Where this net value is £1000 or less the Official Receiver will have no interest in the vehicle. They should therefore be happy for you to keep it as long as the monthly payments are not too high.
Before going bankrupt you must speak to your car finance company and check that they will allow you to keep the car if you go bankrupt. Many finance companies will be fine as long as you maintain the payments. However there are some who will automatically demand the return of the vehicle.
If the net value of your car (second hand value less outstanding finance) is greater than £1000, you will only be able to keep it if you pay the difference to the official receiver.
Is it possible to hand the car back and write off the debt?
You may no longer want to keep your car. Alternatively, perhaps you simply cannot afford to keep up the payments. In these circumstances you can stop paying the finance before you go bankrupt.
Of course the finance company will then demand the return of the vehicle. It will be sold (usually at an auction), and you will still be liable to pay any outstanding money owed. However this debt is now unsecured. As such it will be included when you go bankrupt and written off with everything else you owe.
If you still need a car you can buy a cheap replacement as long as you spend no more than £1000 or less. You will be allowed to keep this once you are bankrupt. Alternatively someone else could buy a more expensive vehicle which you then borrow from them.
It might be possible to take out a new finance agreement on a less expensive vehicle before going bankrupt. However you must not do this without first taking advice. Call us for more information (0800 044 3194).
Can you get car finance while you are bankrupt?
Getting a new car finance agreement during the year you are bankrupt is usually impossible. The only option during this time would be for someone you know to take out the finance in their name (such as your partner or a family member).
Once you are discharged however, there may be a number of sub prime lenders who will consider you. Such lenders are normally prepared to lend to people who have a poor credit rating. Whether or not they will lend to you immediately after you are discharged is difficult to say as lending criteria change all the time. However it is worth enquiring.
If you apply for car finance and are refused you will have to wait until your credit rating starts to improve. Ideally you should start using a so called credit repair credit card. Using this tool for 6-12 months after the date of your discharge will often improve your credit rating sufficiently for sub prime car finance lenders to consider you.
You are unlikely to qualify for car finance from a main stream manufacturer such as VW Finance or Ford Credit until the record of your bankruptcy has come off your credit file – 6 years from the start date.
Hi. I have a car on finance that my sister uses and pays for, so it doesn’t effect me in anyway. However I need to go bankrupt. Would this result in my sister losing ‘her’ car?
Hi Nick
Because the car finance is in your name, I believe the OR would begin from the standpoint that it is your car. However, that doesn’t necessarily mean you/your sister will lose it. It’s a complex situation with lots of ifs and buts.
I have outlined the main ones below. However I think the best way forward would be for us to have a quick chat to discuss it on the phone. If you would like to do that, please give me a call. The advice is free and without obligation (0800 044 3194).
1 – Is there any equity in the car? – ie the difference between its’ second hand value and the finance outstanding. If there is no equity after the finance is taken into account, then the OR has no interest. If there is equity of more than £1000, they may have an interest. However if your sister has been making the payments and can prove this, the OR might take the fact she has built up a part ownership of the car into account which will negate or reduce their interest.
2 – Who is the car finance company? If it’s a main stream company they may repossess the car regardless if you go bankrupt. Their potential reaction would need to be assessed before making any decisions.
Hi i had purchased a car on finance however the car was involved in an accident and was written off. Insurance paid off but I sold the car and the insurance money at the time I gave to other loans. so I dont have the car and also I owe finance agreement. I am now worried that if I go bankrupt will they go to the person who I sold car too. Apparently that person sold on to someone else too.
Hi Dee
There are a couple of things you need to think about here:
First, in terms of selling the car, as long as you sold it for its true value at the time (in its current state at the time of sale) then this transaction is not a problem. The Official Receiver could only try to recover the car if they believed you sold it at under its market value (ie gave it away).
Second (and this is possibly the more important), what type of debts did you use the insurance money and money you got from selling the car to pay off? If you paid off a significant amount to friends and family (within the last 5 years), the official receiver could claim this was a preferential payment. They could then demand that these people pay back the money you gave them.
If you want to find out more about the implications of you going bankrupt before you make the decision, I would be happy to chat to you. The advice is free and confidential (0800 044 3194).
Hi Guys,
I’m currently in bankruptcy. I had a car via PCP and BMW were coming to reposs the car because of my bankruptcy and being behind on payments.
A independent car dealership actually paid-off the outstanding finance to BMW and took ownership of the vehicle.
The official receiver in my bankruptcy is now saying it was an asset of mine and I wasn’t allowed to do this and it is up to them what happened to the car. Is that correct? How can it be an asset when I didn’t own it? And BM,W were coming to collect it regardless of what the official receiver said. Its their property.The car dealership paid-off the outstanding finance to BMW and took it away. I didn’t profit from it. Surely that is okay?
Thank you for your help & advice. Much appreciated :)
Hi Steviej
It would be normal for BMW finance to repossess a car if you go bankrupt. As their finance was secured against the vehicle, they are allowed to go this and it would be their policy.
The official receiver would only have an interest if there was expected there to be any excess value after BMW sold the vehicle and paid off the finance owed. If this had been the case, BMW finance would then have had to pay this remaining money to the OR because it would be classed as a windfall.
I am not sure why you decided to sell the vehicle to an independent dealer rather than just letting BMW finance take it. But again, this would not be an issue as long as there were no excess funds available after the finance was paid. Can you show the OR that the amount the dealer paid for the car (ie the value of the finance they paid off) was fair market value. The easiest way to do this is get a we buy any car.com valuation and use this to show the value was no more than the outstanding finance.
There is only ever an issue if the value of the car was greater than the finance paid off. In this situation, the OR is still owed the excess amount. If they believe this was the case, then this is what they are unhappy about. In these circumstances, if you can prove you did not get anything extra from the dealer, it is not your problem. They can go to the dealer to demand any excess is paid to them.