Many people are under the mistaken belief that filing for bankruptcy allows you to wipe out an auto loan while keeping the vehicle free and clear of any payments. It just isn’t true. Bankruptcy will unwind your obligation to pay back the loan. But if you don’t make the payment, you won’t be driving the car for long. So the short answer is no—you won’t get a free car in bankruptcy.
Even so, it isn’t a given that you’ll lose it, either. In this article, you’ll learn what will happen to your car, and your loan, in bankruptcy.
Buying a car is costly, and most people can’t afford to pay for one outright. Instead, a borrower will finance the purchase by taking out a loan that must be paid back with interest in monthly installments.
However, the bank, wanting to minimize its investment risk, will require the buyer to agree to secure the loan by putting up the vehicle as collateral. This second agreement creates a lien on the car. The lien allows the lender to repossess the vehicle if the borrower defaults (fails to pay) on the loan.
When the transaction is complete, the borrower has two agreements: the agreement to pay back the loan (a promissory note) and the agreement allowing the lender to repossess the car in the event of default (a lien).
Bankruptcy effectively gets rid of debt by breaking the contract between the creditor and borrower that requires the borrower to repay the loan—the promissory note. What bankruptcy doesn’t do, however, is get rid of a voluntary lien, such as a mortgage or car lien. As a result, if a bankrupt borrower doesn’t make an arrangement to pay for the vehicle, once the bankruptcy case is over (or sooner with the court’s permission), the bank will use its lien right to repossess it.
Bankruptcy offers a variety of repayment options, depending on the bankruptcy chapter you file.
Sometimes the best option is letting the car go back to the lender. Many filers will return it when:
If you’re in this situation, when you’re filling out the Statement of Intention for Individuals Filing Under Chapter 7 form, you’ll check the box that states that you plan to “surrender the property.” Once your case is over (or sooner with the court’s permission), the lender will contact you or your bankruptcy attorney to arrange for pickup.