For most people, having a reliable car is very important. After all, almost everyone needs a car to get around town, to drop off kids at various activities, and (most importantly) to get to and from work. So, for most people, it is a necessity they keep their car, even if they file for bankruptcy.
Whether you are able to keep your car and file for bankruptcy is a basic question for your lawyer, and it depends upon such factors as how much the car is worth, when you bought the car, and how much money you owe on its loan.
First, if you own your car free and clear, you can keep the auto if you can exempt it on your bankruptcy schedules. The current federal exemption for automobiles is $3675.00. If your car is worth more than this amount, your lawyer can also use another exemption (sometimes called the “wildcard” exemption) to exempt more of the auto. If you have a lien on the car, just add the value of the exemptions to the amount due on the loan.
If you want to surrender a car and “walk away from it” – that can easily be accomplished in bankruptcy as well. Generally, debtors surrender a car when they are “underwater” on it – they owe more on the car loan than the car is worth. Maybe the car is in poor condition and not worth much, or even damaged in an accident. Also, automobiles can depreciate faster than you can pay them off. This is especially true with new cars and with auto loans at high interest rates.
You may be asking “if I owe more on my car than the loan, won’t I owe money to the auto lender after they repossess it and sell it at auction?
Normally and outside of bankruptcy this is true. After the auto lender repossess the vehicle, it usually sells it at an auction. Generally, the lender will be lucky to get fifty to sixty percent of the vehicle’s worth back at auction. For instance, if you owe $12,000 on your car and the lender auctions it off for only $6,000 – you still owe the lender another $6,000. This is technically called a “deficiency balance.” The reason why you owe this balance is when you signed the papers to finance the car, you promised to pay off the loan, not the car.
After the vehicle is auctioned off, the lender may legally pursue you for that deficiency balance. The lender may even sue you for the balance (although I don’t see this too often). Otherwise, the lender may then sell the account to a collection agency (who will probably be aggressive and harass you endlessly).
Surrendering a vehicle in a bankruptcy is a totally different process. At the beginning of your case, your lawyer will notify the bankruptcy court and your lender that you intend to surrender your vehicle. At this point, the lender has a couple of options: it may wait until after your bankruptcy case is over to retake possession of your car; or it can seek return of the car before your bankruptcy is over. If the lender chooses this course, it must file a motion in the bankruptcy court to lift the automatic stay and then repossess the vehicle.
If you surrender your vehicle in a bankruptcy, you do not have to worry about any deficiency balance. The bankruptcy discharge takes care of that. The deficiency is an unsecured debt that gets discharged.
Once you make the decision to surrender your car in the bankruptcy, it is a good idea to start making alternative transportation arrangements. Although you will be able to stay in the vehicle for awhile, it is prudent to make these arrangements.
Another option is to keep making monthly payments and retain the vehicle. Most lenders will not repossess your vehicle if you keep current on the payments. This way you are covered if you lose your job or are unable to make the payments in the future. Once you receive your discharge, all your debts are discharged (including your car). So, if you (at some point) either no longer want the car or you can’t afford it, you can literally walk away from it.
Another option is to sign a reaffirmation agreement. This is an agreement with the auto lender that allows you to keep the car, but the bankruptcy does not cover it. So, if you fall behind on payments and the auto is repossessed, you are not protected by the bankruptcy discharge. Unlike paying and retaining your car loan, you can never discharge a reaffirmed debt.
Therefore, it is a good idea to ask a qualified bankruptcy attorney about your options regarding your car and bankruptcy. As you can see, there are many options, and the best course of action is not always easy to figure out.