Surrendering a Car in Chapter 7 Bankruptcy

If you have a car loan or a car lease when you file for Chapter 7 bankruptcy, you must choose to keep the car and continue to pay for it or give it back by "surrendering" the vehicle to the lender. This article explains:

• how to keep a financed car in Chapter 7
• the pros and cons of surrendering a vehicle, and
• a cosigner's responsibility after a vehicle surrender.

We have other articles that will help you learn what happens to cars in bankruptcy. You'll find links to additional resources at the end of the article.

How Does Chapter 7 Bankruptcy Work?

After filing for Chapter 7 bankruptcy, the automatic stay stops most creditors from contacting you or taking action to collect the debt—and that includes stopping potential repossessions.

Many debts get discharged in bankruptcy, such as utility bills, medical debt, personal loans, and credit card balances. You'll remain responsible for any nondischargeable debt you have, such as:

• income taxes incurred during the prior three years
• domestic support obligations, and

• most student loan obligations.

Your state bankruptcy exemptions determine the type of property you can protect or "exempt." The Chapter 7 trustee responsible for your case sells nonexempt property for the benefit of creditors.

How to Keep a Financed Car in Chapter 7 Bankruptcy

Determining what will happen to your car in Chapter 7 bankruptcy is a process—especially if you have a car payment. Here's what you'll do:

1. find out how much you owe
2. determine your car's value
3. calculate your car's equity, and
4. check whether exemptions protect all of the equity.

You'll find a more detailed description of the calculations you'll use to determine if you can keep your car in Chapter 7 bankruptcy here. You'll also need to be caught up on the payment and be able to continue making it after your case ends. If it's too much to maintain, surrendering your car in Chapter 7 bankruptcy might be worth considering.

Pros and Cons of Surrendering Your Car in Chapter 7 Bankruptcy

Only you know whether surrendering your car in bankruptcy makes sense. Here are a few points to consider.

Pros. The benefits of giving up a car in bankruptcy include:

• You can walk away from it owing nothing, which is beneficial if it's worth less than you owe or if it needs 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 surrendering your vehicle:

• You'll need to find another mode of transportation.
• Financing a new car might be challenging, and if you can, your loan will likely come with a very high-interest rate.
• You might end up with a car that isn't as reliable as the vehicle you turned in.

How to Surrender Your Car in Chapter 7 Bankruptcy

You'll let the court and the lender know of your decision to let go of the car when you complete the bankruptcy form called the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy. The creditor must obtain permission from the court before repossessing the vehicle by filing a motion asking the judge to lift the automatic stay or 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 car in at an agreed location. The creditor will sell the vehicle at auction, but you won't be responsible for a "deficiency balance" if it doesn't sell for the amount you owe. The deficiency amount will get wiped out in your bankruptcy case.

Example. Jane has a luxury SUV that she can't afford because she is ill and can no longer work. Her car payment is $500 per month. When she files for Chapter 7 bankruptcy, she surrenders the car and is no longer responsible for the car payment.

Surrendering a Car in Chapter 7 Bankruptcy When You Have a Cosigner

If someone cosigned the loan, the cosigner would remain legally responsible for the deficiency balance—the amount remaining after auction—but not the entire debt. The cosigner will get credit for the amount the lender receives in the sale (minus allowed expenses).

Example 1. Edward purchased a new car two years ago. When he filed for Chapter 7 bankruptcy, he owed $12,000 on a car worth only $8,000. He indicated his intention to surrender the vehicle on the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy form. The creditor and Edward's attorney signed a stipulation agreeing that the court could lift the automatic stay. Once issued, Edward turned the car into a local dealership. Edward wiped out all responsibility in the bankruptcy.

Example 2. The second example facts are the same; however, Edward's father cosigned the loan. The car lender sold the car at auction for $5,000, leaving a $7,000 balance due on the debt. Although Edward isn't legally obligated to pay the debt because it was discharged in his Chapter 7 case, his father remains responsible for the $7,000 deficiency. (As an aside, Edward's father could wipe out the deficiency in his own Chapter 7 case, assuming he could meet qualification requirements.)

Learn more about whether your cosigner will be liable for your debt if you file for Chapter 7 bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.