Key things you should know about keeping your car through a Chapter 7 bankruptcy…
Many people filing for Chapter 7 bankruptcy want to know what will happen to their car. Cars are often important to get to work or school and to take care of other important tasks, like buying food. The good news is that most people filing for Chapter 7 bankruptcy are able to keep a modest car.
Whether you can keep your car in Chapter 7 depends on whether you are behind on your car payments, the amount of your car loan (if any), and any available exemptions you can apply to that loan.
You can also keep your car by using one of the bankruptcy options for handling secured debt — redeeming the car or reaffirming the loan. Or, if you don’t want to keep your car, you can surrender it in the bankruptcy.
If you lease your car, your options are different — you can continue with the lease by assuming it in the bankruptcy, or you can terminate the lease by rejecting it.
If you wish to keep your car, you have several options to avoid repossession.
Cure Your Default
Your lender will only want to repossess your car if your loan is in default. The most common reasons a lender will file a motion for relief from the stay is lack of payments or car insurance. If you can afford to catch up on your payments or otherwise cure your default, most lenders will not repossess your car. Of course, for debtors that are significantly behind on payments, it’s often hard to come up with the money necessary to cure.
Negotiate With Your Lender
Car lenders make most of their money through interest payments on your loan. Most lenders would rather have you keep the car and continue making payments instead of repossessing it. If you are in default, consider negotiating with your lender to work out a way for you to cure your default and keep the car. Your lender may be willing to reduce your payments, interest rate, or even principal balance because bankruptcy will discharge your obligation to pay any remaining loan balance if your car is repossessed. But keep in mind that the new loan agreement will be a reaffirmation of the debt which means you will remain personally liable on the loan despite your bankruptcy discharge.
Redeem the Car
You also have the option to redeem (buy back) your car in Chapter 7 bankruptcy for its fair market value. However, you must file a motion with the court and make a lump sum payment in order to redeem. This may be an attractive option if your car is worth significantly less than your loan balance. When you redeem your car by paying the lender its market value, you will own it free and clear after the bankruptcy.
Example. If you own a car worth $3,000 but you have $7,000 remaining on your car loan, you can pay the lender $3,000 to redeem the car and own it free and clear.