If you owe money on your car and you file for Chapter 7 bankruptcy, you must decide whether you want to keep your car or surrender it. This is true whether you financed a purchase of your car or leased your car. If you are considering surrendering (returning) your car, consider your car payments and whether you can afford them, your car's condition, and what might happen if you decide to keep the car.
What Does It Mean to Surrender Your Car?
Your car loan is a secured loan, meaning your car serves as collateral for payment of the loan. Outside of bankruptcy, this means that if you don't make the payments, the lender can take the car to satisfy the debt. A car lease is similar in that the leasing company can repossess the car if you don't make your payments (the difference is that you don't own a leased car).
When you file for Chapter 7 bankruptcy, if you decide to surrender your car, you are agreeing to return the car to the lender or leasing company. You will no longer be able to drive the car, and you will give up your ownership interest in the car (if any). However, you will no longer be responsible for the payments or for any of the remaining balance -- you walk away owing nothing.
Reasons to Surrender Your Car
There are multiple reasons to surrender your car in bankruptcy.
You would otherwise owe a deficiency balance. Even if your car's value is less than what you owe on it, if you surrender it in bankruptcy, you will owe nothing; the difference between the balance due and the value (the deficiency balance) will be discharged in your bankruptcy.
Your payment is high. If your car has a high payment that prevents you from paying your reasonable and necessary expenses, surrendering the car is a good option. Additionally, if the payment is too high, the court may not approve your reaffirmation of the car loan (to learn more, see XXX), and instead order you to surrender it.
Your leased car has excess mileage or wear and tear. If the car is leased, surrendering it means you will not be responsible for any excess mileage or wear and tear. If the car has dents or mechanical problems, or if you're in danger of going over your lease miles, surrendering the car will let you off the hook. Choosing to keep that car would mean you would have to pay for all those problems, despite your bankruptcy.
You are behind on your payments. If you are behind on your car payments, the court (and your car creditor) will likely require you to surrender the car if you're in a Chapter 7 case. This is not a poor choice - surrendering a car on which you're behind will relieve you of responsibility for the missed payments.
Reasons to Keep Your Car
If you need your car to go to work and your payment is reasonable, and if you intend to pay the car off and use it for many years afterward, keeping the car may be a good option for you. If you surrender your car, you have to obtain a new one or find other ways to transport yourself. Buying a new car after a bankruptcy filing is not impossible, but the interest rates can be as high as 24.99%, and finding financing can be difficult. You may have to buy an older car that will cost you in repairs and maintenance, and it may be more cost effective to keep the car you have.
If you want to keep your car, read about your options for doing so in Your Car in Chapter 7 Bankruptcy.
Things to Consider
If you decide to keep a leased vehicle in a Chapter 7 case, you must sign a lease assumption agreement, and once you sign it, you cannot take it back - you're stuck with the car. If you have a lease, make sure you make an informed decision about surrender before signing paperwork. If you financed the car's purchase, you will have a chance to change your mind after agreeing to keep it. (To learn more, see Car Leases in Chapter 7.)
If you surrender your car in a Chapter 7 case and try to finance a new car, the lender may require a copy of your bankruptcy discharge before it will fund the loan. Since you will not receive your discharge for at least two months after your meeting of creditors, you may have to find alternative means of transportation for a while.