Car finance is a secured debt and not included if you go bankrupt. However whether you will be allowed to keep your vehicle will depend on your circumstances.
Jump to article contents:
- Is car finance included in Bankruptcy?
- Will you be allowed to keep paying for the car?
- Can you return the car and include the debt?
- Getting Car Finance after Bankruptcy
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Is Car Finance included in Bankruptcy?
Car finance normally comes in the form of HP (Hire Purchase) or PCP (Personal Contract Purchase). Both these types of finance are secured against your vehicle. As such they cannot be automatically included in bankruptcy.
You have to keep paying the agreement or the car will be repossessed. If you go bankrupt most car finance companies will be happy for you to keep your car as long as your payments do not get into arrears
Having said that it is vital that you check with the company you are using regarding their policy before going bankrupt.
Some car finance companies will automatically cancel your agreement and repossess the vehicle if you go bankrupt. You should check out their policy before submitting your application.
Will the Official Receiver allow you to keep paying for your car?
Once you are bankrupt your circumstances will be reviewed by the Official Receiver (OR). They will decide whether they will allow you to keep your car and maintain the payments. This will depend on a number of things.
Firstly they will consider whether you have a valid reason for keeping the car. Generally speaking it will be OK if you need it to get to work, for family commitments or have a specific medical requirement.
Secondly they consider the value of the car. They will calculate this by taking the current second hand value and deducting the balance of the outstanding finance. There should not be a problem as long as the value less outstanding finance is £1000 or less.
Lastly the OR will look at the monthly payment. As long as it is reasonable they should allow you to include it in your living expenses budget. As a rule of thumb a monthly payment of less than £200 should be allowed.
If the OR thinks your car finance payments are too high they can ask you to stop paying and return it to the finance company. In this situation you could still keep the vehicle if a third party helps with the payments.
Can you Return the Car and include the debt in Bankruptcy?
Car finance can be included in bankruptcy if you are prepared for your car to be repossessed. This may be the case where you have decided you no longer want it or can no longer maintain the payments.
In these circumstances you can cancel your payment and tell the finance company to come and collect the vehicle. Given you are no longer paying they will eventually do this and then sell it at an auction.
The money made from the sale is offset against the balance of the finance you owe. You are liable for any shortfall. However this is now an unsecured debt and as such it can be included in your bankruptcy.
If you have decided to allow your car to be repossessed it is a good idea to do this before going bankrupt. You can then put the money you save towards buying a replacement worth £1000 or less.
Getting Car Finance after Bankruptcy
Generally speaking you will not be able to get car finance during the year you are bankrupt. After you are discharged you are free to apply. However it will still not be easy.
Most lenders will continue to reject you for the next few years. This is because your credit rating will remain poor until the record of the bankruptcy comes off your credit file – normally 6 years from the start date.
Having said you might be able to borrow from an adverse lender (one who will lend to people with poor credit ratings). However you must be prepared to pay a significantly higher rate of interst.
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Hi my husband has a car on pcp now hes gone bankrupt they have issued him with a default notice he hasn’t missed any payments and was allowed by the OR to carry on making payments but they wont allow it!
The O.R office has said it’s nothing to do with them they have no interest in the car, the finance company want full payment or car back and we owe what’s left after sale the O.R office said it cant be added into the bankruptcy what do we do?
Hi Kate
Unfortunately this is a problem with some car finance companies. Many of them will not allow you to keep the car if you go bankrupt. This is the case whether or not the payments have been kept up to date. They will simply say that the terms of the agreement have been broken and the car must be returned.
That said I do have some positive news for you. After the car is returned to the finance company they will likely sell it at auction. They will use what they get to off set against the balance on the agreement. However it is likely there will be an amount outstanding which they will ask your husband to pay. BUT this shortfall can then 100% definitely be included in his bankruptcy. This is because it is what is known as a contingent debt.
The OR is right. They cannot include a car finance agreement in bankruptcy as it is a secured debt. However once the car is sold and shortfall established the OR is then able to include this debt because it has become unsecured.
Hi, So I applied for bankruptcy and it was granted earlier in the year due to lung disease. I was told i could keep the car which is on HP if the finance company agreed. I was advised to inform them that if they did not agree it would be included in bankruptcy. I now find myself in a position where it is no longer affordable or used. What will happen if I terminate my agreement will I still have to pay?
Hi Ursula
If you terminate the agreement and return the car, any shortfall on the finance is still included in your original bankruptcy. You will not have to pay this debt. Once the vehicle has been handed back, you just let the OR know and they will deal with it for you.
Hi I’m am considering bankruptcy, and have a pcp on a vehicle value is around £28000. Would I be able to keep my vehicle I don’t have no assets or savings.
Hi Andrew
If you go bankrupt, whether or not you will be able to keep your vehicle depends on 2 things:
First is its value less than the amount outstanding on the finance. If yes, then it is technically worthless and the OR will normally be happy for you to keep paying for it if you need it (given the payments are not unreasonably high).
Second, the attitude of the finance company. ie If you go bankrupt, is their company policy to repossess the vehicle regardless of your payment history.
I would strongly advise not going bankrupt until you have taken further advise about this so you know exactly where you stand and the options open to you either way. If you would like to have a chat to me about it, I would be happy to speak to you. The advice is free and without obligation. Please give me a call on 0800 077 6180.