Bankruptcy gives you some flexibility in how you deal with your car loan. The bankruptcy forms provide you with at least three choices for dealing with your car loan: You can surrender your car to the lender, redeem the car for its value, or reaffirm the car debt. Let’s explore each option here.
Surrendering the Car to the Lender
In many cases, surrendering your car to the lender is the best course of action for getting a fresh financial start.
If you surrender your car:
- You can walk away from the car owing nothing,
- You can reduce your expenses by giving up a costly car payment that you can’t afford, or
- You can give up a leased car without having to pay for excess mileage or wear and tear.
There are some downsides to surrendering your car. For one, you'll need to find another mode of transportation. And if you buy a new car, it might be difficult to get financing. If you can get financing, your car loan will likely come with a high interest rate because of the bankruptcy.
To surrender your car, you’ll let the court and the lender know about your decision to let go of the car when you fill out your Statement of Intention. The lender must get permission from the court before they can repossess the vehicle. To get permission, the lender will either file a motion asking the judge to lift the automatic stay, or they’ll ask you to agree to it. Otherwise, the creditor must wait until the case is over (and the automatic stay is no longer in effect) before repossessing the vehicle.
Once the court lifts the automatic stay, the creditor can repossess the vehicle or you can voluntarily return the vehicle to the creditor at an agreed location. The creditor will sell the car at auction but if it doesn’t sell for the amount you owe, you won’t be responsible for the balance. It’ll get wiped out in your bankruptcy case.
Redeem the Car for Its Value
If you want to keep the car and the debt underlying it after bankruptcy, the first option is to redeem the car. Redeeming the car means buying it back from the creditor. To do this, you must pay either what you still owe on the debt or the replacement value of the property, whichever is less. Since the payment must be made in a lump sum, bankruptcy filers rarely use this option. After all, most people filing bankruptcy don’t have large amounts of money available to them. This approach also requires you to file a motion with the court.
To redeem a car, you must be current on your payments and the car must be exempt from being seized to pay your creditors.
For more information on redeeming your car, consult this article.
Reaffirm the Car Loan
Reaffirming your car loan means you agree to continue following the rules of the contract that you had with the creditor before you filed bankruptcy. Reaffirming your car loan allows you to keep your car, usually with the same contract terms.
If you enter a reaffirmation agreement for a secured debt, that debt won’t be forgiven in your Chapter 7 case. Any negative effect that it had on your credit will remain on your record, and the on-time payments you make after your bankruptcy will help you rebuild your credit.
You must understand that reaffirming the car loan reinstates your personal liability for the loan. That means if you fall behind on your car payments after filing for bankruptcy, the lender can and probably will repossess the car. And after the repossession, the lender could sue you and get a judgment against you for the pre-bankruptcy debt, hindering your ability to get a fresh financial start after bankruptcy.
Like redemption, to reaffirm your car loan you must be current on your car payments and the car must be protected by an exemption. You’ll also need to appear in court on a set date to explain why you need to reaffirm the debt. If the judge approves your reaffirmation, you’ll get a notice of reaffirmation along with your discharge, and you’ll be able to keep the property as long as you stay current on your payments.
If the court doesn’t approve your reaffirmation agreement, you may still be able to keep the property by letting the debt "ride through" your bankruptcy. In states that allow this option, your debt is forgiven but you must continue making payments according to your existing payment plan. Although the debt will no longer be on your record (meaning any negative effect it was having will be wiped clean), you must continue making your payments. Creditors tend to be very strict about ride-throughs and will sometimes repossess the property after only one missed payment.