What does it mean to surrender your car in bankruptcy?

Surrendering your car in bankruptcy is similar to voluntarily surrendering your car when you can't make the payments any more, with one very important difference: Just giving your car back doesn't get you out of your loan. Instead, the car is sold at an auction and the bank can and will try and collect the balance left on the loan from you. If you're surrendering your vehicle as part of your bankruptcy case, on the other hand, that can't happen. The bankruptcy discharge protects you from having to pay the deficiency balance, no matter how little the bank gets at the auction.

Note: The conversation around surrendering a vehicle in bankruptcy always has to do with cars that still have a car loan attached to them. If you lease your vehicle, you can reject the lease to accomplish the same result. If you own your car free and clear, surrendering it to a creditor is not required. But, if your car is worth more than what you can protect with an available exemption, your bankruptcy trustee may take the car to sell it for the benefit of your other creditors. In that case, you will receive a cash payout for the amount of the claimed exemption that you can use to purchase a different vehicle.

Do I have to surrender my car if I file Chapter 7 bankruptcy?

Not necessarily. This is a decision you make based on what you think is best for your financial future. Note that it can be difficult to keep a car if you're not current with your car payments when your Chapter 7 case is filed. Assuming you are current, you have the following 3 options on how to deal with your car:

(1) Reaffirm the loan: This means you keep the car but you also remain liable on the loan. That means you will have to pay off the car loan - no matter what. Your bankruptcy discharge does not apply to it.

(2) Redeem the car: In a redemption, you pay the bank the amount your car is currently worth and get a clear title to the vehicle. It doesn't matter how much is owed on the loan - whatever is left on that, is discharged.

(3) Surrender the car

Why would I surrender my car if I can keep it?

The options to keep your car both come with certain downsides. If you reaffirm your car loan, you're on the hook for the loan balance. Since cars rarely keep their value, that can be risky. Additionally, it may not make sense to keep the car and continue paying on the loan, for example if the car is not in good condition. Or, if you're struggling to make the car payment every month. Remember your Chapter 7 bankruptcy is supposed to give you a fresh start. It doesn't make sense to keep a car if the monthly loan payment means you're no better off after filing your bankruptcy than before. 

Redemption isn't always an option, no matter how attractive it might be. After all, you have to come up with a lump sum payment equal to the current value of your car. If you can do so without getting caught up in a loan that's even worse than your current loan - great. But, sometimes that's not possible.

When does surrendering my car make sense?

It makes sense if you owe more on your loan than the car is worth and are paying a high interest rate. Even if your interest rate isn't that bad, if you can't easily make your monthly car payment without pinching pennies elsewhere, it makes sense to surrender your car. Finally, it makes sense if the car is not in good condition and you already know that you'll have to put more money into it to keep it running, or, if you simply don't want the car anymore.

How will I get around if I surrender my car?

This is another practical consideration to keep in mind when making this decision. But, remember that - at least for a time - you just need a car to get around; it doesn't have to be your dream car (or even a particularly nice one). Depending on your circumstances and how much your monthly car payment is, not having to make that payment for a couple of months may be enough to buy a car that will work until you can afford to buy a different one.

Additionally, and this is a surprise for many, you will get a lot of offers for car loans in the mail once your bankruptcy case is filed. Most of them will have some pretty harsh terms, but as long as you're smart about it and don't let anyone talk you into a loan payment you can't afford to make, it is possible to finance a car right after a bankruptcy. As an added bonus, such a new loan will help you rebuild your credit if you're able to make all payments on time and in full.

How do I surrender my car?

That part is pretty easy. Once you know you're going to surrender your car, you can stop making payments on the loan. You'll be protected even if the car is repossessed before your case is filed. Assuming that hasn't happened, all you have to do is indicate on your Statement of Intentions that you're surrendering the car. The rest will handle itself once the bank sees this.

How quickly will I have to give up my car after filing?

That can vary. Once your case is filed, the automatic stay prevents the bank from repossessing the vehicle. The bank can file a motion for relief from the automatic stay and only move forward with a repossession once the bankruptcy court grants it. Of course, you can voluntarily make arrangements with the bank to come pick up the car any time after your case has been filed. But, the bank may still file a motion anyway, so they can move forward with the sale of the car.

Do I have to do anything in response to the motion for relief from the automatic stay?

No. Since you're surrendering the car anyway, you can ignore this motion, whether you've already returned the car, or are still waiting for the bank to pick it up The judge will grant it by "default." That will take a minimum of 2 weeks from the date the motion is filed with the court.

What does it mean if the bank doesn't pick up the car or file a motion?

It's not uncommon for car loan lenders to avoid incurring this extra expense, and instead wait for the automatic stay to expire on it’s own. This happens 45 days after your 341 meeting and some even wait until after the discharge has been entered.