What happens if I owe money on a car I need after bankruptcy?

3,324 families filed bankruptcy using Upsolve.

Written by Jonathan Petts, Esq.  
Updated September 4, 2019

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Bankruptcy gives you some flexibility in how you deal with your car loan. The bankruptcy forms provide you with at least three choices for dealing with your car loan. You can surrender your car to the lender, redeem the car for its value, or reaffirm the car debt. 

This article explores all 3 choices. 

1. Surrendering the Car to the Lender

In many cases, surrendering your car to the lender is the best course of action for getting a fresh financial start. If you surrender your car:

  • You can walk away from the car owing nothing

  • You can reduce your expenses by giving up a costly car payment that you can’t afford, or

  • You can give up a leased car without having to pay for excess mileage or wear and tear.

The downsides to the surrender are you'll need to find another mode of transportation. And if you buy a new car, it might be difficult to get financing, and, if you’re able to, it’s likely that your loan will come with a high-interest rate because of the bankruptcy.

To surrender your car, you’ll let the court and the lender know of your decision to let go of the car when you fill out your Statement of Intention form.  The lender must obtain permission from the court before repossessing the vehicle by either filing a motion asking the judge to lift the automatic stay or, by getting your agreement to do so. Otherwise, the creditor must wait until the case is over (and the automatic stay is no longer in effect) before repossessing the vehicle.

Once the court lifts the automatic stay, the creditor can repossess the vehicle, or you can voluntarily turn the vehicle into the creditor at an agreed location. The creditor will sell the car at auction but, if it doesn’t sell for the amount you owe, you won’t be responsible for the balance. It will get wiped out in your bankruptcy case.

2. "Redeem" the Car for Its Value

If you want to keep the car and discharge the remaining debt underlying it after bankruptcy, the first option is to redeem the car. Redeeming the car means buying it back from the creditor. To do this, you must pay the fair market value of the car. Since the payment must be in a lump sum, this is a rarely used option since most people filing bankruptcy don’t have large amounts of money available to them. This approach also requires you to file a motion with the court.

For more information on redeeming your car, consult this article

3. "Reaffirm" the Car Loan

This option allows you to keep your property by "reaffirming" -- agreeing to continue following the rules of -- the contract that you had with the creditor before you filed bankruptcy. Typically the terms of the contract will remain the same. If you enter a reaffirmation agreement for a secured debt, that debt will not be forgiven in your Chapter 7 case. Any negative effect that it had on your credit will remain on your record, and the on-time payments you make after your bankruptcy will help you rebuild your credit. 

You must understand that reaffirming the car loan reinstates your personal liability for the loan.  That means if you fall behind on your car payments after filing for bankruptcy, the lender can, and probably will, repossess the car. And after the repossession, the lender could sue you and get a judgment against you for the pre-bankruptcy debt, hindering your ability to get a fresh financial start after bankruptcy.

As with redemption, you must be current on your car payments and the car must be exempt to do a reaffirmation. In addition, you will need to appear in court on a set date to explain why you need to reaffirm the debt. If the judge approves your reaffirmation, you will get a notice of reaffirmation along with your discharge and will be able to keep the property as long as you stay current on your payments.

But even if the court does not approve your reaffirmation agreement, you may still be able to keep the property by letting the debt "ride through" your bankruptcy. In states that allow this option, your debt is forgiven but you must continue making payments according to your existing payment plan. Although the debt will no longer be on your record (meaning any negative effect it was having will be wiped clean), you must continue making your payments. Creditors tend to be very strict about ride-throughs and will sometimes repossess the property after only one missed payment.

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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