Chapter 7 Bankruptcy: What About The Car?

19 July 2016
 Categories: , Blog


A chapter 7 bankruptcy can help relieve you of the responsibility of repaying your debts, which can be a welcome relief if outside circumstances have made it impossible for you to do so. One major concern, though, may be your car. This is especially true if you depend upon this transportation to get to and from work or school. The following guide can help you better understand your options for keeping the car.

Is the car exempt?

Generally, a car can be considered exempt from forced seizure and sale during the proceedings if you own it free and clear of any loans and if you demonstrate that it is necessary for work, school, or overall quality of life (for example, driving yourself to doctor's appointments due to a rural setting or an area with poor public transportation). The car will be placed underneath an exemption that protects it during the proceedings.

Do you have a car loan?

If you have a loan on the car or have used it for collateral for another loan, then there is the chance that the car could be lost due to non-payment. You have two main options for keeping the car:

  1. Reaffirm the debt. To do this, you will need to continue to make payments as scheduled on the vehicle. In return, the creditor will promise to not to repossess the car as long as the terms of the loan are met. This means that this debt will not be discharged during the bankruptcy.

  2. Redeem the loan. In effect, you are paying off the car, but not for the amount listed on the remaining loan. Instead, you will only pay the fair market value of the car, which then discharges the debt. This is a good option if the car's value is well below what is still owed on the car and if you have enough cash on hand to pay it off.

Should you surrender the car?

This is yet another option that shouldn't be overlooked, especially if you own more than one vehicle. When you surrender during bankruptcy the loan will be written off along with the rest of your debts once the bankruptcy is finalized. If you can't afford the monthly payments or the redeem amount, this may be your only choice. You can use the money saved on payments to purchase a low-cost vehicle for cash if you don't have a second car.

For more help, contact a bankruptcy attorney, such as O'Connor Mikita & Davidson LLC.