Surrendering a Car in Chapter 7 Bankruptcy

If you no longer want a leased or financed car, and are considering returning it directly to the lender or surrendering it in Chapter 7 bankruptcy, you'll want to know your options. Learn how to surrender a vehicle in and out of bankruptcy, how surrendering a car affects your credit, what happens to a cosigner, and more.

What Happens When You Voluntarily Surrender Your Car?

It will depend on whether you negotiate a voluntary return with the lender outside of bankruptcy or surrender the car in Chapter 7 bankruptcy. Both approaches have pros and cons which you'll want to compare and contrast before proceeding.

How Do I Voluntarily Surrender My Car Without Bankruptcy?

While it's possible to surrender a vehicle directly to the bank, it isn't an automatic option, and it doesn't work the way most people hope. In almost every case, you must still pay what you owe, and you'll walk away with a negative mark on your credit report. However, it never hurts to try to negotiate better terms.

Sometimes referred to as "voluntary repossession," the process begins when your auto loan lender agrees to let you voluntarily surrender the vehicle. After the voluntary surrender takes place, the lender sells the car at auction. If it sells for less than what you owe, which it likely will, you (and your cosigner, if applicable) must pay any outstanding "deficiency balance."

Example. Sarah had a car loan with a balance of $15,000. Due to a job loss, she couldn't afford the payments. She contacted her lender, who agreed to a voluntary surrender of the property. The lender sold the car at auction for $8,000. Despite the surrender, Sarah was still responsible for the $7,000 deficiency balance, which the lender pursued through collections, ultimately having a significant impact on her credit score.

Surrendering a Vehicle in Chapter 7 Bankruptcy

Deciding whether or not to surrender your car in Chapter 7 is a personal choice. However, filing for Chapter 7 bankruptcy typically yields a better outcome than alternative approaches.

Pros of Surrendering a Car in Chapter 7

The advantages of letting go of a car in Chapter 7 are pretty impressive. First and foremost, the creditor can't block it, so it's almost always more effective than a voluntary surrender. You have an absolute right to surrender your car in Chapter 7 bankruptcy.

Another undeniable advantage? You don't pay anything. When you surrender a car in Chapter 7, you walk away from your responsibility entirely. Chapter 7 eliminates (discharges) the car loan and any remaining deficiency balance owed after the lender sells the car at auction. It also discharges car leases and any extra fees you'd owe for excess mileage or wear and tear.

But that's not all. You also eliminate any other qualifying debt balances you owe, such as credit card balances, utility and lease payments, medical bills, and personal loans. So you won't just be free of your car payment. Many find themselves completely debt-free and, unsurprisingly, feeling less stressed than they had in years.

Cons of Surrendering a Car in Chapter 7

Of course, letting go of a car in Chapter 7 comes with downsides. You'll need to find an alternative mode of transportation, which might not be as reliable as the vehicle you turned in. Additionally, financing a new car after bankruptcy can be challenging and typically comes with a very high interest rate. The bankruptcy notation on your credit report will also make it challenging to rent housing and open bank accounts for a period of one to two years.

Another potential problem? Not everyone qualifies. Even so, if you earn more than allowed, restructuring debts in Chapter 13 (paying less than you owe over time) might be an option. You can surrender a car in Chapter 13 bankruptcy as well.

Finally, because Chapter 7 filers can keep only so much property, Chapter 7 might also not be for you if you'd lose things other than the car you'd like to get rid of. In that case, Chapter 13 might meet your needs because it allows filers to retain all their property.

Does Surrendering a Car Hurt Your Credit?

In most cases, yes. Preventing a credit hit requires that you fully pay what you owe in the manner agreed upon. The only exception might be if you voluntarily surrender the car and the creditor agrees not to notate your credit report in a way that negatively impacts your credit. While it never hurts to ask for beneficial terms—after all, all the creditor can say is no—it would be unusual for a creditor to agree to them.

As well, a Chapter 7 bankruptcy filing will remain on your credit report for up to ten years. While it will significantly impact your credit, the effect lessens over time as you work to rebuild it. For instance, you should expect challenges with obtaining reasonable loans. Any credit offers extended will likely be at a high interest rate.

It's also common to have problems securing rental housing and new bank accounts, so you'll want to take steps to ensure these essentials are in place before filing. Another proactive approach would be to learn about credit rebuilding strategies that work over time.

For instance, opening a secured credit card or taking out a small loan will enable you to establish a history of timely payments, which is crucial when rebuilding credit after bankruptcy. Then, monitor your credit regularly to ensure you're making progress. Over time, as you successfully navigate more diversified credit types, you're almost sure to see your credit grow, and many people even purchase homes two to four years after bankruptcy.

How Surrendering a Car in Chapter 7 Affects You and Your Cosigner

The bankruptcy will eliminate (discharge) your responsibility to pay the debt completely, even if the creditor recovers less than what you owe after selling the vehicle at auction. You won't be responsible for the outstanding amount known as a "deficiency balance." It will be eliminated in your bankruptcy case.

However, a Chapter 7 discharge won't apply to a cosigner. If someone cosigned a car loan that you erased in Chapter 7, the cosigner would receive credit for the amount the lender gets in the sale, but would remain legally responsible for the deficiency balance. Learn more about cosigner liability in Chapter 7 bankruptcy.

Example. When Edward filed for Chapter 7, he surrendered a car he owed $12,000 on that was worth $8,000. Edward's father cosigned the loan. The car lender sold the car at auction for $5,000, leaving a $7,000 deficiency balance. 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.

The Process of Surrendering a Vehicle in Chapter 7

The notification process is simple. You'll let the court and the lender know of your decision to return the car by checking a box on the bankruptcy form called the Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy (Statement of Intention).

The bankruptcy code allows you to file it up to 30 days later, or by the first date set for the 341 meeting of creditors, whichever occurs first. (11 U.S.C. § 521(a)(2).) However, many file the form at the same time they file the bankruptcy petition, so they don't forget, because there are consequences for not filing the form (more below).

Example. Jane has a luxury SUV with a monthly payment of $900. She was unable to make her car loan and other monthly payments after becoming ill and unable to work. When she filed for Chapter 7 bankruptcy, she notified the court and lender of her intention to surrender the car in her paperwork.

When the Creditor Will Take the Car

You don't immediately lose the car after filing the Statement of Intention. The automatic stay order (injunction) that prevents creditors from collecting against you also applies to vehicle repossessions and stops the lender or lessor from seizing it. (11 U.S.C. § 362.) The creditor can recover the car under two scenarios—either when the automatic stay is lifted or the debtor returns it voluntarily.

Through voluntary agreement. Most debtors want to complete the bankruptcy case quickly and agree on a date, time, and location for surrendering their vehicle to the lender. Therefore, in most instances, the return process proceeds smoothly and without any unexpected occurrences.

After the automatic stay lifts. If you don't agree to surrender the car voluntarily, the creditor can't proceed while the automatic stay is in place. The automatic stay could lift after one of the following events.

• The creditor can file a motion requesting that the judge lift the automatic stay.
• The automatic stay will terminate if the debtor fails to file the Statement of Intention on time or doesn't surrender the vehicle within 30 days of the meeting of creditors (or later, if extended by the bankruptcy court). The trustee concurrently loses the right to sell the vehicle for creditors. (11 U.S.C. §§ 521(a)(2); 362(h).) The two bankruptcy code sections work together to terminate the automatic stay by law. However, from a practical standpoint, most creditors still file a motion to lift the stay to confirm that the stay has lifted before proceeding with repossession.
• The creditor can wait until the case ends and the automatic stay is no longer in effect before repossessing the vehicle. A Chapter 7 case typically lasts approximately four months. Usually, the Chapter 7 court will issue a discharge and lift the automatic stay at the four-month point even if the case remains open to resolve other issues.

Because procedures can differ, a local bankruptcy lawyer would be in the best position to advise you about the most likely approach your creditor will take.

If You Don't Want to Surrender a Financed Vehicle in Chapter 7

Whether you'll lose a vehicle in Chapter 7 will depend on its value, whether you can protect its equity with an exemption, and, if it's financed, whether you're current on the payment. The analysis must be done in two steps because you'll need to meet different criteria to protect your car from the trustee and the lender.

Protecting the Car From the Trustee

Your state bankruptcy exemptions determine the type of property you can protect or "exempt." If you can't exempt all of the car's equity, the Chapter 7 trustee will sell the car and use the proceeds to repay creditors. To determine whether your car is at risk of being sold by the trustee, you must figure out whether an exemption fully covers it.

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.
4. Check whether a bankruptcy exemption protects all of the equity.

For more detailed instructions, read The Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy?

Protecting the Car From the Lender

You'll want to be current on your car loan when filing because, unlike Chapter 13, Chapter 7 isn't set up to help you catch up on payments. If you're behind on payments, the lender typically asks the court to lift the automatic stay during bankruptcy, and if successful, seizes the car. Others wait until the Chapter 7 case ends to repossess it.

That's not to say helpful options aren't available—the two most often used are discussed below in "Redemption and Reaffirmation Agreements." Still, you should understand their limitations, qualifications, and risks before filing, and not simply hope all will work out (just as you should be current on your payments before filing if you can afford to because doing so significantly lessens the chance of losing the car).

Learn more in Can You File Bankruptcy on a Car Loan and Keep the Car?

Redemption and Reaffirmation Agreements

Redemption allows you to pay the lender the current market value of the car in a lump sum. This option is beneficial if the car's value is less than the loan amount (and you can use it to keep a car if you're behind on the payment). To find the funds, look for a lender specializing in redemption agreements. You should be able to find one through an online search. Another option would be borrowing money from a family member.

Example. David owed $10,000 on his car, but its current market value was only $6,000. He filed for Chapter 7 bankruptcy and chose to redeem the vehicle. He secured a $6,000 loan from a specialized redemption lender, paid the lender the lump sum of $6,000, and was able to keep his car free and clear of the original loan debt, even though he was behind on payments.

Your car lender might also require you to sign a reaffirmation agreement (or you might want to), which is essentially a new contract between you and the lender. This contract typically mirrors the original terms, although you might be able to negotiate a reduced interest rate or other favorable adjustments.

Example. Maria wanted to keep her car after filing Chapter 7 and met both requirements of being current on her payments and being able to protect the equity with the motor vehicle exemption fully. She and her lender entered into a reaffirmation agreement on the same terms as the original agreement.

You'll find more details in Options to Keep Your Car in Chapter 7 Bankruptcy.

If You Don't Want to Lose a Leased Vehicle in Chapter 7

You can assume the lease and keep the vehicle in Chapter 7 if you're current on the lease payments and can afford to continue making them. You'll use the Statement of Intention form to indicate your desire to retain the car, and the lessor might require you to sign a new lease agreement.

Unlike financed vehicles, you can't redeem a leased vehicle by paying its market value. Additionally, if you're behind on your payments, you'll need to surrender the car unless you can negotiate an alternative option with the lessor. However, you shouldn't plan on it because the lender is under no obligation to work with you and, in most cases, will opt to recover the car.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? We wholeheartedly encourage research and learning, and you can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. These resources can explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Additionally, information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.