The answer to that question is it depends? Unfortunately that answer is applicable to many legal questions, because many legal questions depend heavily on the particular facts and circumstances of an individuals case. So what are the general rules that govern what happens to your car in a Chapter 7 bankruptcy?
Well first of all, if there is no loan on the car, you may be able to keep your car depending on how valuable it is and what exemptions are available to you. Exemption law is a matter of state and federal law. Depending on where you are domiciled you might be able to use the federal or the state exemptions available to you, or you might be stuck with your state's exemption laws. This article is not going to spend anymore time on this topic, but just know that an exemption may apply allowing you to keep a car you own outright.
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So what if you have a loan on the car. First, some basics about debt. There are generally two types of debt, and each is treated differently in Bankruptcy. There is secured and unsecured debt. Secured debt is debt that is tied to a piece of property, or in other words is secured by that property. If you fail to pay the debt, the creditor can then take that piece of property, which is referred to as the collateral. Unsecured debt is debt that is not tied to any property or collateral. An example of secured debt would be a car loan. The loan is the debt you owe the bank, the car is the property or collateral. If you fail to pay the loan the bank takes the car. An example of unsecured debt would be the credit card bill. That debt is not secured by anything, if you fail to pay the credit card bill they have no automatic right to repossess any particular piece of property.
So we know that a car loan is secured debt. What that means is we have three options under the bankruptcy code as to how to handle secured debt. These options are (1) surrender, (2) redeem, or (3) reaffirm.
Surrender is what it sounds like. You can surrender the car to the bankruptcy trustee and you no longer have to pay the loan associated with it. Your personally liability on the loan is gone. Unfortunately, you no longer have the car now.
Reaffirmation also kind of sounds like what it is. Basically in this scenario you agree with the bank who has the loan on the car that you will continue making payments on it, and you will sign a reaffirmation agreement. This agreement basically sets out a new loan and payment plan that will survive the bankruptcy. After you discharge your debts in bankruptcy this reaffirmed loan remains and you must now make those payments. You can keep the car but you also have new payments to be made.
The last option is redemption. To redeem property in bankruptcy you basically make a one time for fair market value payment of the property. In this case it is the car. So you make that one payment for fair market value and then the car is yours free and clear. A couple interesting things to note here, you get to make the payment based on the fair market value. so if you have a large loan on the car and the vehicle is not worth very much at all, then this is great. You basically crammed down the loan to the value of the collateral and then paid it all off in one payment. But how can a person just make a large one time payment for fair market value if they are in bankruptcy? Where do they get the money? The answer here is that redemption really works well for highly depreciable property. Things like computers, or home electronics that you want to keep. These things are usually not extraordinarily expensive to begin with, and then on top of that they depreciate very quickly in value. For example that computer you bought last year, well it is probably obsolete. so if you had a loan on the computer, the value of the computer is probably much much less than the value of the collateral, the computer in this case. So a redemption payment there makes sense. For a car, maybe not, it depends on the car. Also, and this might surprise some readers, but there is a whole cottage industry that lends money to people going through a bankruptcy for the specific purpose of making a redemption payment. So if you want to make that large redemption payment on the car, you might be able to get a loan for it, oddly enough, right in the middle of a bankruptcy. There are lots of other requirements in the code to be able to make a redemption payment, for example the property being redeemed has to be exempt in addition to others.
Surrendering, reaffirming, and redeeming property in bankruptcy is very complex and consultation with a qualified bankruptcy attorney is advised. This article is just a very basic overview, and the point is in a chapter 7 bankruptcy there are options that allow you to keep your car should you need to.
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