If you are filing for bankruptcy under Chapter 7, you may be able to keep your car by using the exemption for it. Most states provide a bankruptcy exemption of a certain amount for a vehicle. If you are no longer making payments on a car, and it has no equity beyond the exemption, you can protect it entirely. On the other hand, people who are still making payments on a vehicle will need to decide whether keeping it makes sense in their situation. They may choose to surrender the car rather than trying to keep up with payments. If you notify the court that you will surrender your car, this will get rid of your car loan.
Some people need to choose between Chapter 7 and Chapter 13, which can involve evaluating many factors. If your car is an important factor, you can read more here about what might happen to your car under Chapter 13.
Determining the Value of Your Car
You will need to provide the value of your car, as well as other assets, when you are filing under Chapter 7. This is the fair market value of the car, rather than the amount that you paid for it or the amount owed on a loan. The fair market value is defined as the cost of a car that is similar in its age and condition to your car. You can determine its base value by referring to industry standards, but you also will want to consider any additional factors that might reduce the value of your car. If you are claiming that your car’s value is very different from what industry standards would suggest, you may need to provide evidence of the difference. Cars that are unique or likely to have a very high value may require assistance from a licensed appraiser.
If you have kept up with your payments on a car, you can redeem the car by paying its current value to the lender as a lump sum. The key is that redemption is based on the car’s current value rather than the full amount of the loan. Depending on how much the car has depreciated, this may make a substantial difference.
A reaffirmation agreement is a contract to keep your vehicle under the same terms or similar terms to those in the initial promissory note that you used when purchasing the car. You can let the lender know that you are considering filing for bankruptcy, which may give it an incentive to make concessions. Most lenders do not want a debtor to surrender a car and get rid of their liability on it. The lender may let you discharge your obligations under the loan by paying back the car’s current value. If it does not, surrendering the car may be your best option.
Often, the bankruptcy court will need to approve the agreement. Approval is based on whether the agreement is in the best interests of the debtor, taking into account their income, the debt, and the value of the car. You can avoid submitting the agreement to the court for approval if you have an attorney, as long as the attorney is willing to sign the agreement and attest that it is in your best interests.
A reaffirmation agreement has many potential drawbacks. You still will need to pay back the deficiency in the loan after your bankruptcy ends. Once you file under Chapter 7, you must wait eight years before filing again, so you may face significant financial pressure in the meantime.
When Your Car Payments Are Not Current
If you have not kept up with your payments on a car, you may still be able to redeem the car if you can afford to do it. Alternatively, you can try to reach a reaffirmation agreement with the lender that will integrate the overdue payments. However, the lender has a right to take away your vehicle if you are not current on your payments when you file under Chapter 7, unless you can redeem the car.