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