When Do You Have to Surrender a Vehicle in Chapter 7 Bankruptcy?

For those seeking a fresh financial start, Chapter 7 bankruptcy has plenty of upsides. It’s the cleanest, most straightforward, least time-consuming, and least expensive of the various bankruptcy options.

The downside? It can be the most severe. They don’t call it “liquidation bankruptcy” for nothing.

Chapter 7 applicants run the risk of having to surrender personal possessions of value to satisfy creditors, your car, potentially, among them.

Whether bankrupts must, or possibly should, surrender their car is a question without easy answers. The factors can be personal, emotional, and pragmatic. Each Chapter 7 applicant’s mileage may vary.

Do You Have to Surrender Your Car in Chapter 7 Bankruptcy?

When it comes to bankruptcy, there are few cut-and-dried responses to even the simplest questions. Instead, the answer to almost all questions, including whether you must surrender your car, is: It depends.

Even under straight, or “liquidation” bankruptcy, you don’t lose everything. The bankruptcy code provides allowances for what it considers “exempt” property, the sorts of possessions that enable you to work and maintain your household.

Most people who file Chapter 7 bankruptcy keep household furnishings and retirement accounts, as well as equity in a house and car.

To determine how much equity you can protect, review your state’s exemption statutes. Consult the motor vehicle exemption and, if available, a wildcard exemption. Some states let you combine those exemptions into a single personal possession.

Determine your vehicle’s fair market value using sources such as Kelley Blue Book or the National Auto Dealers Association. Report that figure in your bankruptcy application and be prepared to provide evidence of your finding.

Calculate your car’s equity. If your vehicle is free and clear, the equity equals the car’s value. If you have an outstanding loan, your equity equals what would remain if you sold the car and paid off the loan. Keep in mind, your equity could be zero, or even negative.

Weigh the car’s equity against allowable exemptions. If exemptions cover all the equity, you can keep the car. However, if the vehicle has nonexempt equity — that is, it’s worth more than the equity you can protect — it’s possible the Chapter 7 trustee will order the car sold. In that case, you will receive the exempt amount, sales costs will be deducted, and the balance will be distributed among creditors.

Reasons to Voluntarily Surrender Your Car

“There are a few reasons when surrendering your car might make sense,” says Derek Jacques, principal owner of the Mitten Law Firm in Southgate, Mich.

“One, if you really can’t afford payments, then it would probably be best to unload those payments,” he says. “Likewise, if your loan is underwater, meaning you owe way more than the car is worth. Other reasons to surrender your car may include the fact that you have another vehicle you want to exempt.”

Additional factors to weigh when mulling whether to voluntarily surrender your car include:

• Avoid being stuck with a deficiency balance. You may be upside down on your loan (or lease), but if you surrender the car in bankruptcy, the gap between what is owed and what the car is discharged (that is, it goes away).
• Eliminate a high payment. You may have taken out your loan when times were good, and you may still love the car. Nonetheless, now it’s time to consider whether that steep monthly payment interferes with satisfying your reasonable and necessary expenses.
• Prevent the court from intervening. If your payment is unacceptably high, your application to reaffirm the car loan may be rejected by the court; instead, you could be ordered to surrender the car.
• Avoid getting stuck for excess mileage or wear and tear as part of a lease. Surrendering a leased car that has mechanical troubles or dents, or risks exceeding the lease mileage, washes your hands of potential charges. Keeping the car means facing those costs, despite your bankruptcy.
• Erase your payments — unpaid back payments and all future payments. If you’re behind in your payments, the choice of surrender may be made for you by the court and your car-loan creditor. Getting out from under those missed payments could be a good thing.
• Eliminate future maintenance expenses. If your car has mechanical difficulties and it’s certain you’ll face expensive repairs to keep it road-worthy, surrendering it can be a shrewd financial decision.
• If satisfactory alternate transportation is available — mass transit, car pools that will accept you as a paying rider, a loaner from a relative or friend — you can save, at least temporarily, on loan payments, maintenance, fuel, parking, and insurance costs.

Implications of Voluntarily Surrendering Your Car

Life after voluntarily surrendering your vehicle can be complicated. Let Jacques enumerate just a few of the reasons to be wary.

“Long-term, surrendering your vehicle can hinder your ability to obtain a loan for a new vehicle, as your credit score will almost certainly take a hit,” he says. “In many states, your credit score may also impact your auto insurance rates, which is another added cost.”

Then there are logistics, a key component of your decision to surrender your car. How will you get around? Mass transit? Carpooling? Uber? Loaner? Bicycle?

Notes Jacques, “You may lose your job if you surrender your car without any other means to get to work.”

Perhaps your post-Chapter 7 life will involve a modest (but reliable) used car. How? Bankruptcies are public record. Lenders bearing offers to finance your next car (under fairly punishing terms) will flood your mailbox. Make smart choices; avoid biting off more than your new financial life can chew.

Moreover, voluntarily surrendering your car — rather than having it repossessed — will be easier on your ego. A voluntary surrender unfolds on your terms, usually between 30 and 45 days after your discharge is finalized (assuming the lender does not file an objection). Generally, everyone involved in the transaction will be genially professional.

By contrast, the repo man arrives unannounced and in no mood for pleadings. All the personal stuff in your car? That probably goes, too. Adding insult to injury, you could face additional charges, including the towing fee. That’s right: You could be on the hook for the expense of the lender claiming your car.

Either way, the lender will sell the car, with the proceeds going toward the outstanding loan balance. As noted above, if there’s a deficiency balance — the outstanding loan balance is more than the selling price — that amount is wiped clean in your bankruptcy decree.

The Process of Surrendering a Car in Chapter 7 Bankruptcy

Surrendering a car in Chapter 7 bankruptcy involves more than leaving it in the lender’s parking lot and handing over the keys. The court is particular about nailing down the details, not just for the protection of creditors, but for the bankrupt’s as well.

The decision to relinquish the car will be noted in your Statement of Intention for Individuals Filing Under Chapter 7 Bankruptcy. When the application is filed, various protections (the legal term is “automatic stay”) kick in, including a cessation of attempts to collect debts and repossession procedures.

Impatient creditors may petition the court to lift the automatic stay or could seek your agreement to surrender the vehicle early.

Otherwise, once your case is filed, you notify the creditor about your intentions regarding your car. Usually, the actual handoff occurs at least 30 days after a court-ordered meeting of creditors (a 341 meeting), at which time the opportunity for the bankruptcy trustee to object to your plan will have expired.

Absent the trustee’s objection, the exempted property in your bankruptcy plan will be yours. Generally, you may continue to drive the car for up to 45 days after your 341 meeting, but don’t test the goodwill of the court or the creditor. Schedule the surrender in a timely fashion and abide by the agreement.

The creditor will sell your surrendered car and apply the proceeds to your loan (or lease) balance. If there’s a shortfall, you will not be held accountable for it.

How to File for Chapter 7 Bankruptcy and Keep Your Car

It is possible to file for Chapter 7 bankruptcy and keep your car. Several scenarios apply, including:

• The car is paid for, and its value is fully covered by the applicable exemptions, it’s yours to keep.
• You’re still making payments on a loan (or lease), but you’re up-to-date and the ongoing impact on your post-filing budget is manageable.
• If you’re current on your payments, you can “redeem” your car under provisions of bankruptcy. That is, you pay the lender a lump sum equal to the current value of the car rather than the full amount of the loan; depending on depreciation, which may make a sizable difference.
• You can keep the car under a reaffirmation agreement with the lender. Alert the lender about your bankruptcy plan; because most lenders hope to avoid the headaches involved with reselling vehicles, you may be in a position to bargain for loan concessions. Reaffirmation, Jacques says, “is usually the best strategy, as long as you can afford the payments.”
• If you’re behind on your payments, redemption is still an option, as is a negotiated reaffirmation agreement.