If you file for Chapter 7 bankruptcy, you'll have to decide what you want to do with your car or other vehicle. If you are current on your payments, you can keep the car by reaffirming the loan or redeeming the car. If you don't want to keep the car, you can surrender it through the bankruptcy. This article provides an overview of these options.
If You Have Significant Nonexempt Equity in Your Car, You May Lose it to the Trustee
None of the below discussion will be relevant if you have lots of equity in your car that is not protected by an exemption. In that situation, the bankruptcy trustee will likely sell your car and use the proceeds to repay your unsecured creditors. To learn how exemptions work, see our Bankruptcy Exemptions area.
You Must Stay Current on Payments
Chapter 7 bankruptcy does not provide a way for you to catch up on delinquent payments. If you want to keep your car in the long term, you'll have to get current on your loan. Chapter 13, on the other hand, allows you to make up arrearages on car loans through your Chapter 13 plan.
Your Options If You Want to Keep the Car
If you want to keep your car, you can reaffirm the loan or redeem the car.
Reaffirming Your Car Loan
You reaffirm the car loan by signing a reaffirmation agreement. The reaffirmation agreement is essentially a new contract for car payments. You and the lender can agree to change the payment terms, or leave them as is. The bankruptcy court must approve the reaffirmation agreement.
Be very cautious before signing a reaffirmation agreement. If you reaffirm the loan, it will not be discharged in the bankruptcy. This means that if you cannot pay the loan after the bankruptcy is over, and the lender repossesses your car, you will be liable for the deficiency balance.
To learn more about reaffirmation agreements, including the pros and cons of them, see Will the Chapter 7 Trustee Agree to My Reaffirmation Agreement?
Redeeming the Car
You can also redeem your car by paying the lender the current market value of your car in one lump sum. This can be a good option if your car has little value and it would cost you more to purchase a new car after your bankruptcy. For example, if your car is worth $4,000 subject to a $15,000 loan, you can redeem the car for $4,000. The only catch is that you have to be able to make that payment in full before your bankruptcy case closes. To learn more about redemption, see Redeeming Property in Chapter 7 Bankruptcy.
Your Options If You Don't Want to Keep the Car
If you don’t want to keep the car, you can surrender your car to the lender and walk away from the debt. The lender will sell the car and you will not be liable for any additional costs. To learn more about what happens to your car in Chapter 7 and Chapter 13 bankruptcy, see our Your Car in Bankruptcy area.