Surrendering a Car in Chapter 7 Bankruptcy

If you have a car loan or a car lease when you file Chapter 7 bankruptcy, you must choose whether you will keep the car and continue to pay for it or whether you will surrender it and discharge (wipe out) the debt. You’ll let the bankruptcy court and the car lender know of your decision on the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy form.

In this article, you’ll learn about Chapter 7 bankruptcy and things to consider when deciding whether to surrender the car.

What Is a Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy provides financial relief to qualified individuals struggling with debt. Once filed, the automatic stay stops most creditors from contacting you. While in place, those creditors cannot call you, send you bills or letters, or take other action to collect the debt. If you have a car loan when you file for bankruptcy, the creditor cannot repossess the car.

On average, you can expect the Chapter 7 process to take three to four months.

A Filer Must Meet Qualification Requirements

Not everyone is entitled to a Chapter 7 discharge. Your household income can’t exceed the state median income for a family of the same size. If your gross income is less than this amount, qualifying is simple. Otherwise, you’ll have a second opportunity to pass the means test. In that portion, you’re able to subtract necessary expenses—including taxes, mandatory payroll deductions, and childcare—from your income to see if you pass.

Debts You Can Wipe Out (Discharge) in Chapter 7 Bankruptcy

Many of the debts that plague the average consumer will go away. For instance, you’ll be able to wipe out utility bills; medical debt; personal loans, such as payday loans; and major credit card and department store balances.

You won’t be able to get rid of everything, however. You’ll remain responsible for any nondischargeable debt, such as balances on secured credit accounts commonly used by stores that sell jewelry, electronics, furniture.

Here are a few other obligations that you’ll remain responsible for:

• income taxes incurred during the prior three years
• domestic support obligations, such as child or spousal support, and
• student loan obligations.

You Can Keep Certain Property

A person who files a bankruptcy (a debtor) doesn’t lose everything. A debtor can keep (exempt) the property allowed by the debtor’s state. In most cases, it will include:

• some equity in a residential home
• clothing and household belongings
• a modest car (usually determined by the amount of equity in it), and
• an ERISA-qualified retirement account.

You’ll find exempt property listed in your state exemption statutes. Property that isn’t covered by an exemption is called “nonexempt” property. The bankruptcy trustee—the official who administers the case—will sell the debtor’s nonexempt property and distribute the sales proceeds to creditors.

If you want to keep your car in Chapter 7 bankruptcy and have a car payment, you’ll need to be caught up on the payment and be able to continue making the payment after your case ends. One of the primary reasons people surrender a car is due to a car payment that’s too expensive to maintain.

(Find out more, including options for keeping your car, in Chapter 7 Bankruptcy and Your Car.)

Pros and Cons of Surrendering Your Car

Whether surrendering your car is a good idea will depend on your particular financial situation. Here are a few points to consider.

Pros. The benefits of surrendering a vehicle in bankruptcy include:

• You can walk away from the car owing nothing, which is beneficial if the car is worth far less than you owe on it or if it’s in need of 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 surrender your car:

• You'll need to find another mode of transportation.
• If you buy a new car, it might be difficult to get financing, and, if you’re able to, it’s likely that your loan will come with a very high-interest rate because of the bankruptcy.
• You might end up with a car that isn’t as reliable as the vehicle you turned in.

Process for Surrendering Your Car

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

Example. Jane has a luxury SUV that she can no longer afford because she became ill and can no longer work. Her car payment is $500 per month. When she files Chapter 7 bankruptcy, she surrenders the car and is no longer responsible for the car payment.

Surrendering a Car When You Have a Cosigner

If someone cosigned the loan, the cosigner would still be legally responsible for the deficiency balance—the amount remaining after auction—but not the entire debt.

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. After he indicated his intention to surrender the car 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 order the lifting of the automatic stay. Once issued, Edward turned the car into a local dealership.

Example 2. All of the facts in the second example are the same; however, Edward’s father co-signed on 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 $7,000 deficiency. (As an aside, Edward’s father could discharge the deficiency in his own Chapter 7 case, assuming that he could meet qualification requirements.)

(To learn more, see Will Your Cosigner Be Liable for Your Debt if You File for Chapter 7 Bankruptcy?)