Keep, Surrender or Redeem Your Car in Chapter 7 Bankruptcy

Many people believe they will lose their car in chapter 7 bankruptcy. After all, chapter 7 bankruptcy is the “liquidation” bankruptcy; non-exempt assets are sold for the benefit of creditors. Also, while unsecured debts can be discharged in chapter 7 bankruptcy secured debts ride-through the bankruptcy. With that in mind, our bankruptcy attorney on rosevillebankruptcy.com is often asked whether a car will be sold in chapter 7 bankruptcy. The answer is that a client’s options for keeping their car depend on several factors.

Do you own your car or is it financed?

If you own your car outright whether you keep your car depends on its value. If your car’s value exceeds the maximum exemption amount your car can be sold in chapter 7 bankruptcy; however, you will receive its exempt value in the form of a payment. In contrast, if your car’s value is less than the exemption amount you will keep your car in bankruptcy.

Many clients have a car loan that exceed the value of their car. These clients are usually better off surrendering or redeeming their car in bankruptcy. To learn more about walking away from a car loan or paying off its fair market value in exchange for title call our bankruptcy lawyer at (916) 500-0704.

Surrender your car

If your car is financed you can always surrender your car in chapter 7 bankruptcy. When you surrender your car in chapter 7 bankruptcy you are not liable for any deficiency you owe the lender. For instance, if you owe $15,000 on a car that’s only worth $5,000 at auction and surrender that car in chapter 7 bankruptcy, you will not be liable for the remaining $10,000. This ability to discharge outstanding car loans is a huge advantage of chapter 7 bankruptcy. So, if you are “underwater” on your car loan and have missed several payments surrendering the car can be a smart move in chapter 7 bankruptcy.

Keep your car

If you want to keep your car you can either reaffirm or redeem. If you reaffirm your car loan you will continue to be liable for the debt after bankruptcy. If you redeem the car you must pay the lender fair market value. Our lawyer can help you determine which path is right for you.

Reaffirm

A reaffirmation agreement is a contract between you and your car lender to remain liable for the amount you owe on the car despite the bankruptcy filing. When you enter into a reaffirmation agreement you are removing this debt from discharge in bankruptcy. If you fall behind on your car payments after bankruptcy the lender can reposes the car and sell it at auction. If the sale proceeds fall short of what you owe you will be liable for the deficiency balance. Reaffirming a car debt impedes your fresh start after bankruptcy since you are agreeing to remain liable for the car loan. Speak with a bankruptcy attorney before entering into a reaffirmation agreement.

Redeem

When you file for chapter 7 bankruptcy you have the option of redeeming your vehicle. When you redeem a vehicle you make a lump sum payment to the lender in the amount of the fair market value of your car. So, using the aforementioned example, if your car is only worth $5,000 but you owe $15,000 to the lender, you can redeem your car by filing a motion and making a one-time $5,000 payment to the lender. Once you have redeemed your car you own it outright.