Your Car in Chapter 7 Bankruptcy

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 retain it if its value is below your state's vehicle exemption amount (the amount of equity you can protect in a vehicle). However, if you are making payments on your car, it's not so simple. You’ll need to decide whether you want to surrender the car or keep it and continue to make payments and let the bankruptcy court know your decision on an official form called the Statement of Intention for Individuals Filing Under Chapter 7. Similarly, if you’re leasing your car, you’ll indicate whether you will reject or assume the lease on the statement.

(To learn about all of your options, see 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 statement and check the box that indicates you intend to surrender the vehicle—that is, hand it back over to the lender. As a result, you won't be responsible for the car loan after your bankruptcy. If you are leasing your vehicle, you can get out of the lease by checking the "No" box on the statement in response to the question that asks whether you will assume the lease.

Keeping a Car You're Still Paying For

If you want to keep a car that you are making payments on, your options will depend on whether you’re current on your payments and whether you can pay the current value of your car in a lump sum payment.

• If your payments are current. 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 vehicle under much the terms as your original car's promissory note (although this is negotiable).
• If your payments aren't current. You can redeem the car if you have the money to do so. If you don't, you can try asking the lender to enter into a reaffirmation agreement and to include the missed payments in the new payment arrangement. However, your lender is under no obligation to modify your payment when you’re behind.

Some lenders will allow you to keep the car without doing anything other than staying current on your payment. However, you could lose the car without warning because the lender will be able to repossess the vehicle at any time. You’ll want to talk with an attorney about the pros and cons before selecting this approach.

Also, unless you can pay the value of your car in a lump sum payment, you should understand that if you're behind on your payments when you file, your lender doesn’t have to agree to let you keep the vehicle.

Reaffirmation Agreement

Reaffirmation agreements aren’t available to everyone. Here’s what you need to know:

• Negotiating the reaffirmation agreement. If you want to reaffirm the car loan, you'll say this on your statement. When the lender sends you the agreement setting forth the same or similar terms as your old deal, you can try to negotiate the terms to your advantage. You do have some leverage because the lender knows that bankruptcy gives you the option of surrendering the car and canceling all liability. Banks 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 refuse. In that case, you might want to consider surrendering the car and letting 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 to the terms of the reaffirmation agreement, you'll sign it and file it with the bankruptcy court. The clerk will set a hearing so the judge can decide whether the agreement is in your best interests. After considering your income, the amount you owe on the car, and its value, the judge might decide that the reaffirmation will create an undue hardship for you or your family and that the agreement is not in your best interests. If you still owe significantly more than the car's value, a judge might disallow the reaffirmation. The point of the bankruptcy is to get you out of debt, and so judges are hesitant to let you obligate yourself to an unfavorable agreement before your bankruptcy is over.
• Your attorney can approve the reaffirmation agreement. If you have an attorney representing you, and your attorney will sign the reaffirmation agreement attesting that it is in your best interests, you can avoid going to a hearing in front of the judge. Instead, you'll file the signed agreement, and the court will automatically approve it.
• What will happen if the judge (or your attorney) approves the reaffirmation. If the bankruptcy judge (or your lawyer) 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, and you owe $25,000 under the agreement, if your car is worth only $10,000, you'll be on the hook for the $15,000 deficiency. Remember that you can't file another Chapter 7 bankruptcy for another eight years, so you could be back where you started before you filed for bankruptcy. Even worse, the lender will have eight years to collect the debt. These are also some of the reasons why a judge might not approve the reaffirmation in the first place.

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 the trustee $5,000 to keep your vehicle free and clear. Learn more about how redemption works in Chapter 7 bankruptcy.

Valuing the Car

When you fill out your bankruptcy paperwork, you’ll be asked to state the current value of all of your property, including your vehicle. Figuring out the current value of your car—or how much it’s worth—can be confusing. Current value, also known as fair market value, is the amount it would take to buy a similar vehicle (or the amount you would get if you sold the actual car) given the car’s age and condition on the date that you file for bankruptcy.

The court expects you to use legitimate resources when determining the current value. For instance, bankruptcy trustees use trade websites relied on to determine a common industry standard, such as the Kelley Blue Book and the NADA Guide. Once you find the base value of your car, you’ll want to make adjustments to take into account any conditions that would affect the value, such as needed repairs (and be prepared to provide proof in the form of photographs and repair estimates).

If your vehicle is unique, such as an antique or modified car, you can start by finding comparable vehicles on online auction sites and in sales advertisements posted by individual owners. Ultimately, if you and the trustee (or lender) disagree about value, it might be worthwhile to hire a licensed appraiser.