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 is below 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.
(To learn about all your options, see Nolo's section on Your Car in Chapter 7 Bankruptcy.)
Walking Away From the Car
If you want to walk away from the car when you file Chapter 7 bankruptcy, 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 For
If 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).
Negotiating the Reaffirmation Agreement
If you want to reaffirm the car loan, you'll say this on your Statement of Intention. When the lender sends you the agreement setting out the same or similar terms as your old agreement, you can try to negotiate the terms to your advantage. You do have some leverage here, because the lender knows that bankruptcy gives you the option of surrendering the car and canceling all liability. Lenders lose a lot of money on repossessions, so they have an incentive to cut you a better deal, such as reducing the principal of the loan to the car's current value. Don't be afraid to attempt to negotiate for this. All the lender can do is say "No." If the lender does say "No," you may want to consider surrendering the car at this point, and let the bankruptcy erase your liability for the remaining payments on the loan.
Getting Court Approval of the Reaffirmation Agreement
Once you and the lender have agreed on the terms of the reaffirmation agreement, you'll sign the agreement and file it with the bankruptcy court. At the "discharge hearing," near the end of your bankruptcy, the judge will decide whether the agreement should be enforced. After considering your income, the amount you owe on the car, and its value, the judge may decide that the reaffirmation will create an undue hardship for you or be against your best interests. If you still owe much more than the car's value, a judge might disallow the reaffirmation.
What Happens If the Judge Approves the Reaffirmation
If the bankruptcy judge approves the reaffirmation agreement, you will continue to be liable under its terms after your bankruptcy ends. For instance, if you have to give the car back due to a loss of income, at a time when you owe $25,000 under the agreement and your car is worth only $10,000, you'll be on the hook for the $15,000 deficiency. Remember that because you can't file another Chapter 7 bankruptcy for eight years, you could be back where you started before you filed for bankruptcy (another reason why a judge might not approve the reaffirmation in the first place).
Keeping the Car Through Redemption
The other option is to pay the trustee the current value of the car in one lump sum, called redeeming the vehicle. The advantage of this strategy lies within the "current value" language -- you don't have to pay off the loan balance, just the value of the car. The difference between those two figures is often significant. You may owe $10,000 on your car loan, but due to depreciation your car is worth only $5,000. To redeem, you'd pay $5,000 to the trustee in order to keep your car free and clear. Learn more about how redemption works in Chapter 7 bankruptcy.