Cars and Bankruptcy: The Basics

Bankruptcy Trustees and Equity Beyond Exemption

When you file a Chapter 7 case, the bankruptcy trustee may care about your vehicle and the equity you have in it. Equity is the value of the vehicle over how much you owe. If this amount is greater than what would be covered by the vehicle exemption, the bankruptcy trustee may have an interest. It is rare that there could be excessive equity, but it is wise to meet with an attorney to be sure it is not a problem for you.

Lender Surrender

If you cannot afford to continue making payments or you have better alternatives, you may not want to keep the vehicle you have. While it is good to know what you want ahead of time, it is also possible to be behind in payments, file Chapter 7 bankruptcy to prevent repossession, and the realize that you cannot keep your vehicle.

Surrendering a vehicle without bankruptcy can leave you with the potential to be sued for what you would owe after your vehicle is sold, plus repossession and other costs. A frequent reason for filing bankruptcy, a Chapter 7 will very likely write off these costs, also known as a deficiency balance. 

Reaffirmation to Keep Your Vehicle

You can keep your vehicle two different ways: being current on your loan, or filing a Chapter 7 and then getting current within 30 to 60 days. In order to keep your vehicle, you will likely have to sign a reaffirmation agreement excluding your vehicle loan from the write-off of the rest of your debts. The process goes as follows:

  1. Sign the agreement.
  2. Make sure it is filed within the small amount of time granted (often within 60 days of your hearing). This requires you to be current a few weeks before this.
  3. Stay current on your loan in order to keep the car.
  4. Remember that if your vehicle is surrendered or repossessed later, you will owe a deficiency balance just as if you had never filed bankruptcy.

There are risks and rewards to this process, so it is wise to speak with your attorney about what is best for you before you move forward.

Finding your Best Bankruptcy Option

The terms of your original loan contract are often non-negotiable, especially with national creditors. If you want to keep your vehicle when working with one of these companies, you much follow these terms. However, flexibility is sometimes offered by local finance companies, so it is a good idea to ask your attorney if your vehicle creditor has been flexible before.

If you need to keep your vehicle, but you cannot afford the payments and you owe more than it is worth, a Chapter 13 may be something for you and your bankruptcy attorney to consider.

The Bottom Line 

Filing a Chapter 7 is the best option for those wishing to surrender a vehicle, or those that wish to keep their vehicle and are current or will be in the next few months after filing bankruptcy.

Need a bankruptcy attorney? Contact the Law Offices of Brad A. Woolley to discuss what bankruptcy option is best for you.