Should You Surrender an Unwanted Car in Bankruptcy?

Many Americans who think about filing for bankruptcy worry that doing so could cause them to lose their car or truck. There are processes in place that can help a bankruptcy filer keep their vehicle. But sometimes, when the monthly payments they signed up for are simply too expensive, keeping their vehicle just isn’t practical. Some filers may even be anxious to get rid of their cars for this reason.

If you’re considering filing for bankruptcy and still wondering how to make ends meet, surrendering your car as part of your bankruptcy process may be an excellent way to rid yourself of an expensive monthly payment. There is a specific process that you’ll need to follow when surrendering your vehicle. If your lender fails to pick up your surrendered vehicle, it’s important to understand their motivations and how to respond to this inaction. This guide provides valuable information about both topics.  

Motor Vehicles and Bankruptcy

When you decide to file bankruptcy, you’ll have some decisions to make about vehicles that you own. There is no one right way to approach the decision of whether to keep your car or surrender it when filing for bankruptcy. The right decision for someone else may be the wrong decision for you. Only you can know what the unique needs of your family are, what expenses your budget will accommodate, and whether continuing to make your car payments is worth your effort.

It’s important to understand that auto loan debt isn’t usually dischargeable in bankruptcy if you want to keep your car. Your car loan is a secured debt, which means that your lender has the right to take back the collateral used to secure the loan if you default on your payments. Your car serves as that collateral. If you want to keep your car, you’ll be required to keep making payments and your debt won’t be forgiven. If you surrender your car, your payment obligations as a borrower will end and your lender will take back their collateral.

Procedure for Surrendering Your Vehicle

If you want to surrender your vehicle to the dealership, you’ll need to indicate your intentions on your bankruptcy paperwork. Once the court has given the lender permission to repossess your car, you’ll need to make arrangements for your lender to reassume possession of your property. They may pick it up or you can meet at a mutually agreed upon location for transfer. Most of the time, the surrender process takes no more than a few weeks once the court has given the lender permission to take a vehicle back and/or a bankruptcy case has been finalized.

The primary benefit of surrendering your vehicle is that you’ll no longer owe payments on the auto loan and any remaining debt connected to your car or truck will be discharged. This approach can get collection agencies off your back and allow you to refocus your income on paying down non-dischargeable debts. But it’s important to understand that there are a few drawbacks to this option, too. Car repossession will show up on your credit report and will negatively affect your credit score. You can rebuild your credit score over time, but doing so will take some effort on your part.

What if the Creditor Fails To Pick Up My Car?

The “when” of repossessing your car after bankruptcy is really up to the lender. But what if months have passed and your creditor hasn’t picked your car back up? Your lender may choose not to reassume physical possession of the car because repossessing it, repairing or restoring it, and reselling it is too expensive to be worth the lender’s trouble. Your creditor will remain the owner of your vehicle, even if they don’t take possession of it. This means you won’t be able to sell it, as there will be a lien attached to your title. You’ll essentially be stuck with your car until the lender either picks it up or you pay off the remainder of your loan.

While you can continue to use your vehicle for as long as you keep your insurance current, you may want to schedule a free consultation with an attorney experienced in bankruptcy law. A bankruptcy attorney may be able to find an alternative solution to your situation or help you figure out if there’s a way to get your creditor to take back your vehicle as you intended them to do when you filed for bankruptcy.

Thinking You Might Want To Keep Your Car?

The decision to keep your car or surrender it to your lender is a big one. If your car is at risk of being repossessed, you may feel like you need more time to consider your options but that you have to act faster than you're comfortable with just to avoid having your car repossessed. Fortunately, this isn't the case. If you’re concerned about a repo, know that bankruptcy filers benefit from a legal protection known as the automatic stay.

When a filer submits a bankruptcy petition to the court, that filer’s creditors are prohibited from engaging in collection actions until the case has been resolved. In this way, filing for bankruptcy can actually protect a vehicle owner from having their car or truck repossessed until after they decide to reaffirm, redeem, or surrender their vehicle and a discharge in their cases has been entered.

Before deciding whether to keep your car or surrender it, it’s important to understand what surrender entails. That way, you’ll know what to expect once you’ve made a decision either way.

Keeping Your Car in a Chapter 7 Bankruptcy Case

If you’re filing for Chapter 7 bankruptcy and you want to keep your car, you’ll be pleased to learn that there are bankruptcy exemptions that can help you protect your primary vehicle. This is true whether you choose to file for federal exemptions or state exemptions. Each state and federal exemption structure is different, so you’ll want to double-check how the auto exemption works where you’re filing your bankruptcy case.

In a nutshell, each jurisdiction either exempts your primary car or truck or it exempts a certain amount of equity in your vehicle. Without this exemption to protect the vehicle, your Chapter 7 bankruptcy trustee could sell the vehicle and use the proceeds to repay your creditors. The exemption status allows you to keep either your vehicle or a specific amount of equity in the vehicle safe from sale by a bankruptcy trustee. 

If the governing law in your case only permits you to exempt a certain amount of equity in your car and your car is worth more than the exemption limit allows, you may need to use some of your wildcard exemption or other flexible exemption opportunities to protect the remainder of your equity. 

To find out how much equity you have in your vehicle, subtract the amount you still owe on your loan from the market value of the vehicle. For example, if your original car loan was $10,000 and you’ve made $8,000 worth of car payments so far, you still owe $2,000 to your lender. If your car is worth $5,000 on the current market, your equity in your car would only be $3,000. That’s the current market value of $5,000 minus the $2,000 that you owe on the loan. Even though you've paid $8,000 on the loan so far, you can't have more equity in your car than its market value. 

An alternate example would be if you owe $5,000 to your lender, but your car is only worth $2,000. In that case, you would have negative equity in your car. This is sometimes called being upside-down on a loan.

If you want to keep making your car payments, you’ll either need to reaffirm your car loan or redeem your car loan. Reaffirmation confirms your commitment to keep making payments according to the terms of your loan contract. If the court approves your reaffirmation agreement, you’ll get to keep your car. To redeem your car loan, you’ll need to pay off any remaining market value of the vehicle in a lump sum. This option makes the most sense if you owe more on a vehicle than it is worth.

Keeping Your Car in a Chapter 13 Bankruptcy Case

If you’re filing for Chapter 13 bankruptcy, you may keep your car if you choose to. Your payments will become part of your Chapter 13 bankruptcy plan. Depending on how much you owe and how much your car is worth, you may benefit from a Chapter 13 cramdown. A cramdown allows you to repay only the market value of your vehicle over the life of your bankruptcy plan instead of the full amount you still owe. Once you’ve successfully completed your repayment schedule, you’ll own the title to your vehicle free and clear.

Let’s Summarize…

If you’re filing for bankruptcy, you’ll want to take many things into consideration before deciding whether to keep or surrender your car. The value of the car, how burdensome your loan payment schedule is, and the remaining length of your loan term are all factors that may influence your decision. If you choose to surrender your car when filing bankruptcy, you’ll need to follow specific procedures. If your creditor refuses to retake possession of your vehicle, you may need to speak with an attorney about your options as you will not be able to sell your car until your loan is paid off.