Law Office of Gail L. Hills

What Happens To My Car In Chapter 7 Bankruptcy?

by Gail L. Hills, Esq.

What Happens To My Car In Chapter 7 Bankruptcy?

car in driveway


A big question many people have when filing chapter 7 bankruptcy is what happens to their car if they still owe money on it.  One thing is for sure, whether you are filing for bankruptcy or not, if you don’t keep making your payments the bank will be able to repossess it.  Whether you want to get rid of your car or keep it, the bankruptcy law offers options for dealing with the debt on a car.  If you don’t want to or can’t keep your car, you can surrender it by turning it over to the bank.  If you want to keep it, you have two choices – either reaffirm the debt or redeem it.  Here is what it all means:

Surrender it

If you want to get rid of your car you may choose to surrender it to the bank.  There are some very good reasons why people choose this option.  Maybe the terms of the loan are too burdensome or the car needs more repair work than it’s worth.  Whatever your reason for giving up your car, you will not owe another dime on it so long as your chapter 7 bankruptcy is discharged.

Keep it

If you decide to keep your car, you must continue making payments on it – even throughout the bankruptcy process.  You will have to reaffirm this debt.  After your bankruptcy petition is filed, the bank will send your attorney a reaffirmation agreement in which you agree to be legally obligated to continue paying your car loan.  The terms of these agreements are typically the same as those in the original contract.  You must understand that if you do not make the payments after your bankruptcy case is over, the bank may repossess your car and sue you for any balance owed.  By signing a reaffirmation agreement, you are giving up your right to have this particular debt discharged through bankruptcy.

Your reaffirmation agreement will be submitted to a judge for review.  The judge may sign the agreement, yet often times they do not sign because they believe the agreement is not in your best interest.  Instead, the judge may issue an order that says if you continue to make payments on the debt, the bank has to accept them and cannot repossess your car.  You continue paying on the original debt as though you never filed bankruptcy.

Redeem it

Redemption is a device in chapter 7 bankruptcy that allows you to keep your car and pay only its value, instead of the amount you owe the bank.  For instance, you owe $10,000 on your car that is worth only $6,000.  You can redeem and pay only $6,000, while the remaining $4,000 is discharged through your bankruptcy.

The downside to redeeming your vehicle is that you will have to pay the full $6,000 in one lump sum payment.  I know, if you had that kind of money lying around you might not be in bankruptcy.   There is always the option of borrowing the money.  You can ask a family member or friend to loan you the money.  There are also banks that offer redemptions loans for those who are in bankruptcy.  These loans are commonly referred to as 722 loans, named after the section of the bankruptcy code that addresses redemption.

Chapter 7 bankruptcy offers you the chance to get rid of a car that you can’t afford, keep it and continue paying the debt, or reduce the amount you owe.  It is important that you discuss these options with your bankruptcy attorney to decide which option is best for you in your particular circumstance.