What Happens to Your Car in Chapter 7 Bankruptcy?
Republished with Permission © 2011 Nolo.
by Attorney Stephen R. Elias
Chapter 7 bankruptcy allows you to keep or surrender your car or truck.People often wonder how Chapter 7 bankruptcy will affect their ability to keep their car. If you aren't making payments on a car, then you'll be able to keep it if its value falls under your state's vehicle exemption amount. However, if you are making payments on your car, it's not so simple. During your bankruptcy, you'll need to decide whether you want to surrender the vehicle or keep it by continuing to make payments. You let the bankruptcy court know what you want to do by filing an official form called the Statement of Intention (SOI) with your other bankruptcy papers, as well as mailing a separate copy of the SOI to your vehicle lender. Similarly, if you are leasing your car, you can either reject the lease on your SOI or can keep the car by assuming the lease.
Walking Away From the CarIf you want to walk away from the car, you list the lender on your SOI and state that you intend to surrender the vehicle -- that is, turn it in to the lender. This will clear you of any further liability on the debt after your bankruptcy. If you are leasing your car, you can get out of the lease by rejecting the lease on your SOI.
Keeping a Car You're Still Paying ForIf you want to keep a car you are making payments on, no matter what else is going on in your bankruptcy, you should continue to make your payments as scheduled. You do have a choice, however, on how to keep the car: You can either pay the lender a lump sum to purchase the car at its current value (called redemption ), or enter into a new contract (called a reaffirmation agreement), which lets you keep your car under much the same terms as your original car's promissory note (although this is negotiable).
Sometimes your lender will let you keep the car without entering into a reaffirmation agreement, by simply allowing you to continue to make the payments under the old agreement (this is called the ride-through option). If your lender has been accepting your payments, it's a sign that you may be able to retain the vehicle and continue making payments without entering into a new reaffirmation agreement.
Negotiating With the Lender to Keep the CarTo find out whether your lender will require a new contract, call them and ask for the bankruptcy or loss mitigation department. Explain that you intend to file for bankruptcy and ask whether you need to reaffirm the promissory note or can instead retain the car and continue making payments without reaffirming.
If the lender agrees to let you retain the car and pay according to the old agreement, the lender will still have a lien and can repossess the car if you default on your payments. But if the car is repossessed (or if you decide to give it back), you won't have to worry about still owing a deficiency on the car (the amount of the loan minus what the lender can sell the car for) -- that will be wiped out after your bankruptcy case is over.
If the lender requires you to reaffirm the promissory note and you do reaffirm it, consider carefully whether you want to do this. The lender will have a right to repossess the car if you default on your payments and you will owe any deficiency that remains on your loan if that happens. If you want to reaffirm your loan, you'll take the following steps.