Options to Keep Your Car in Chapter 7 Bankruptcy
Here's an overview of your options if you want to keep your car in Chapter 7 bankruptcy.
If you own a car and file Chapter 7 bankruptcy, what you do with your car will depend on whether you owe money on it and, if you do, whether you can afford to keep it. If you do not owe money on the car, you may have to pay to keep it unless you can exempt the entire value. If you do owe money on it, you must indicate to the court whether you intend to reaffirm the debt, redeem the car, or surrender the car.
Car With No Loan: Trustee Must Abandon or Debtor Must Pay
If you do not owe money on your car, the value of the car becomes property of the bankruptcy estate. The Chapter 7 trustee's job is to sell estate property for the benefit of your creditors. (Learn more about how Chapter 7 bankruptcy works.)
To protect your property, bankruptcy law allows you to exempt certain property from the estate. The federal exemptions and most states' exemptions allow you to protect a certain amount of value in a motor vehicle; if you are able to exempt the entire amount of your car, or if the nonexempt portion is negligible, the trustee will abandon the property and allow you to keep the car. (To learn more about how car exemptions work, and to find the motor vehicle exemption amount in your state, see The Motor Vehicle Exemption in Bankruptcy.)
If there is substantial nonexempt equity in your car, you can choose to turn your car over to the trustee, who will sell it and pay you your exemption, or you can pay the trustee the nonexempt equity and keep the car.
Reaffirming the Car Loan
If you owe money on your car, you can choose to reaffirm the debt in Chapter 7 and keep the car. Reaffirmation means that you will sign a contract with the creditor agreeing to continue paying for the car and remain liable on the debt in exchange for keeping it. This reaffirmation agreement binds you to the debt as if the bankruptcy had never happened. If you sign a reaffirmation agreement and obtain your Chapter 7 discharge without rescinding the agreement, you are bound by the agreement and liable for the debt, despite the bankruptcy discharge. For this reason, you must show that you need the car and that the payment will not be an undue hardship; otherwise, the court will disapprove the agreement and the creditor will repossess the vehicle.
Learn more about reaffirming debt in Chapter 7 bankruptcy.
Redeeming the Car
Your second choice for keeping a car on which you owe money in a Chapter 7 is redemption. If you choose to redeem the car, you must offer to pay the car lender the current market value of the vehicle in a lump sum, even if the value is less than what you owe. The creditor must agree to the value; if you and the creditor cannot come to an agreement on the value, the court will decide. (To learn more about how redemption works, including restrictions on its use, see our article on redeeming property in Chapter 7 bankruptcy.)
Example. Joe filed Chapter 7 bankruptcy. Last year, he financed a used car. He still owes $8,000 on the car, but the agreed value of the vehicle is $5,000. Joe can redeem the car by paying the creditor $5,000. The remaining $3,000 balance will be discharged in his bankruptcy.
Surrendering the Car in Bankruptcy
If, in the end, you decide not to keep the car or you cannot afford the payments, you can surrender it. When you surrender your car, you give it back to the car lender, and your entire liability on the debt will be discharged in your Chapter 7 bankruptcy. The creditor will either have to wait until your bankruptcy is over to repossess the car or file a motion with the court to allow it to do so.
To learn more about what happens to cars in bankruptcy, see Your Car in Chapter 7 Bankruptcy.