Chapter 7 Bankruptcy and Keeping Your Car

October 12, 2009 By

In a Chapter 7 bankruptcy, you usually have the choice to keep or give up your car. You let the Court and your vehicle lender know your intentions by filing a Statement of Intent (SOI) with your bankruptcy paperwork.

Giving Up Your Car

If you choose to give up your car, you inform your vehicle lender that you intend to surrender the car. Once you’ve given up your car, you are granted a discharge to the remaining amount of the car loan (or lease) and you do not have to pay the lender back.

If you own your car outright (in other words, without a car loan) and the car is worth less than $2,400 then you may be able to keep it in a Chapter 7 bankruptcy.

If you owe money on your car and want to keep it, you may be able to do so if (a) you keep making your payments; and (b) have less than $2,400 in equity.  You may also need to enter into what is called a reaffirmation agreement with the lender, which is essentially a new promise to repay the balance of the car loan in spite of the fact that you filed for bankruptcy.  If you sign a reaffirmation agreement then you will be held liable personally for any default after your bankruptcy.  In other words, if you fall behind on the car after bankruptcy the lender will be able to repossess the car AND chase you for the unpaid balance.

If you don’t want to sign a reaffirmation agreement (personally, I never recommend that my clients sign one) then you may be able to continue to make payments and keep the car through the bankruptcy.  Different car lenders have different positions on whether they’ll allow this, so you’ll need to talk to your lawyer (that would be me, if we decide to work together) to figure out a plan to tackle this situation.

Finally, what if the car is worth more than $2,400 and you have no car lender?  Well, the Chapter 7 trustee may decide to take the car from you.  If this happens you will have two options:

  1. let the Chapter 7 trustee take the car, in which case you’ll get back a check for up to $2,400 from the trustee when the car is sold; OR
  2. make a deal with the Chapter 7 trustee to keep the car in return for a lump-sum payment (this is called redemption).  The payment would normally be close to the difference between the value of the car and $2,400, which is your exemption allowance for an automobile.  Negotiating this lump-sum payment can be tricky, so we can work together to make a plan.

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Filed Under: Bankruptcy Information
  • Rhanu

    I am in Michigan, and did no sign a Reaffirmation Agreement on my leased vehicle- However, the leasing company is allowing me keep the car for the remainder of the lease term as long as I continue to make the payments.  Am I responsible for ANY deficiency (overage of miles, damage) when I turn the car in?

    What if i still have a balance “due” that includes late payment fees, last month’s payment, etc.. What happens if i don’t pay this?  I’m having a hard time finding the answers to these questions – Please help!