Chapter 7 bankruptcy gives you a couple of options for your car when you’re still paying on it. Basically, you can either keep paying or you can surrender (i.e., give back) the vehicle.

What’s The Situation?

This is about a vehicle that you still owe on, where your finance company is the lienholder on your vehicle title, and where there’s no more equity (value beyond the debt) than is covered by your available exemptions. In other words, this is not a vehicle that your Chapter 7 trustee is going to be interested in, either because it has no equity (e.g., it’s worth less than the debt against it) or because the equity is small enough to be protected by the exemption. The following options also apply to car leases.

Ch. 7 Options For Your Car

Even if the bankruptcy trustee doesn’t want your car, your car finance company might. But if you need to keep the car, especially for work, there is a certain path that you need to follow.

How To Keep Your Car in a Chapter 7 Bankruptcy

1. First, if you don’t want to keep your vehicle, you can surrender it to the creditor after your bankruptcy is filed. (Or you can surrender it before you file, but that gets risky—be sure you have talked to your bankruptcy attorney and have a clear game plan beforehand.) If you give back your vehicle without bankruptcy, you’ll owe and you might be sued for the “deficiency balance”—the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added. (The deficiency balance you’ll owe can be crazy high.) But bankruptcy will write off (i.e., discharge) the deficiency balance.
2. If you want to keep your car through a Ch. 7, you have to be current on your loan. In other words, make your car payments during bankruptcy. So if you aren’t current, you’ll need to quickly get current and stay there. Some lenders will allow you to be a month or so behind on your loan, but I’ve found that when a bankruptcy has been filed, they suddenly change their tune and they want to you be current on your payments. Depending on the lender, you might need to sign a reaffirmation agreeing to legally exclude the vehicle loan from the bankruptcy discharge, but most lenders don’t work that way. I generally don’t recommend a reaffirmation agreement except under certain narrow circumstances. You should discuss this issue with an experienced bankruptcy attorney before your bankruptcy is filed.

The Takeaway

In general, “straight bankruptcy”—Chapter 7—can be the best way to go if your vehicle situation is pretty straightforward: you either want to give back your car, or you want to keep the car and you’re current on the loan or can quickly get current.

If you have questions about how to keep your car in a Chapter 7 bankruptcy  – or about how to get rid of it – schedule an appointment with Bankruptcy Attorney Jennifer N. Weil, Esq. by calling 201-676-0722. Or you can schedule your own appointment online at my Setmore page.