Should I surrender my car in bankruptcy?

In many cases, surrendering your car in bankruptcy can be a great idea, although there are some drawbacks.  Here is a list of pros and cons of surrendering your vehicle after filing. 

Pros. The benefits of surrendering a vehicle in bankruptcy include:

• You can walk away from the car owing nothing, which is beneficial if the car is worth far less than you owe on it or if it’s in need of repair.
• You can reduce your expenses by giving up a costly car payment that you can’t afford.
• You can give up a leased car without having to pay for excess mileage or wear and tear.

Cons. Here are some of the downsides to surrender your car:

• You'll need to find another mode of transportation.
• If you buy a new car, it might be difficult to get financing, and, if you’re able to, it’s likely that your loan will come with a very high-interest rate because of the bankruptcy.
• You might end up with a car that isn’t as reliable as the vehicle you turned in.

Process for Surrendering Your Car

You’ll let the court and the lender know of your decision to let go of the car when you fill out one of the official bankruptcy forms—the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy form. The creditor must obtain permission from the court before repossessing the vehicle by either filing a motion asking the judge to lift the automatic stay or, by getting your agreement to do so. Otherwise, the creditor must wait until the case is over (and the automatic stay is no longer in effect) before repossessing the vehicle.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 stay, the creditor can repossess the vehicle, or you can voluntarily turn the vehicle into 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 will get wiped out in your bankruptcy case.

Example. Jane has a luxury SUV that she can no longer afford because she became ill and can no longer work. Her car payment is $500 per month. When she files Chapter 7 bankruptcy, she surrenders the car and is no longer responsible for the car payment.