Your Vehicle Loan Options in a Chapter 7 “Straight Bankruptcy” Case

For many people, no debt has more practical importance than their car or truck loan.

Whether you want to keep your vehicle or get rid of it, and whether you are current or behind on your payments, Chapter 7 bankruptcy strengthens your hand in every way.

The “Automatic Stay” Gives You the Chance to Decide to Keep or Surrender

As long as you file your Chapter 7 case before your vehicle gets repossessed, your lender can’t repossess it once you do file. The same “automatic stay” law that stops all your creditors from calling you, suing you, and garnishing your wages also stop your vehicle lender from repossessing your vehicle—at least for a month or so while you decide whether to keep your car or not, if you haven’t already decided one way or the other.

Surrendering Your Vehicle

If you decide to surrender your vehicle, Chapter 7 bankruptcy is often the best way to do so. The reason is because with most vehicle loans even after surrendering the vehicle you would still owe money to your lender after the surrender, often a much larger amount than you would think. This “deficiency balance” is the amount you owe after the lender repossesses the vehicle, sells it—usually at an auto auction, pays itself its costs of repossession and sale out of the proceeds of sale, and then pays the rest of the proceeds towards your loan’s interest, late fees, and principal balance.

Because of the relatively low sale price of your vehicle at an auto auction, and the relatively high repossession and sale costs, in the end you often have a very hefty debt, and no vehicle. Because at that point you’re understandably not all that motivated (or able) to pay this remaining debt, the lender would then usually sue you to make you pay it.

Surrendering your vehicle during your Chapter 7 case allows you to legally and permanently write off (“discharge”) that entire remaining debt, instead of having it hang over you.

Keep Your Vehicle

If you want to keep your car or truck, whether you are current on your loan, and if not how quickly you can catch up, are crucial.

If You Are Current

If you want to keep your vehicle and are current at the time your Chapter 7 case is filed, and can keep making the payments on time (especially after discharging your other debts), it’s simple: you can essentially keep your vehicle loan out of your bankruptcy case. You’d usually sign a “reaffirmation agreement” stating that you intend to hang onto your vehicle and giving your consent to not discharging the vehicle loan in your Chapter 7 case.

If you owe more on the loan than your vehicle is worth, you should think twice about signing a “reaffirmation agreement.” That’s because doing so makes you continue to be liable on a debt you could be discharging in bankruptcy. Instead carefully consider whether you should surrender it and dump the debt. It’s your one chance to do so. Otherwise you would risk being unable to make your payments later, losing the vehicle to repossession, and owing a large deficiency balance because you had “reaffirmed” the debt in your bankruptcy case.

Unfortunately you can’t “have your cake and eat it too”: you usually can’t keep a vehicle that you owe on without reaffirming the debt. Most conventional vehicle loan creditors insist that you sign a “reaffirmation agreement” for the full balance of the loan, even if your vehicle is worth less than that.

But sometimes, especially with smaller lenders, you may be able to avoid “reaffirming” the vehicle debt, or can “reaffirm” at a lower balance. Talk with your attorney about what’s possible with your own lender.

If You Are Not Current

If you want to keep your vehicle and aren’t current on the vehicle loan at the time your Chapter 7 case is filed, your options are limited. You would usually need to get current very quickly to be able to keep the vehicle—usually within a month or two. Most vehicle lenders will not allow you to skip the missed payments or even to catch up on those payments over time—although a minority of them will allow some flexibility.

But for the majority of lenders who insist on a full “reaffirmation” of the vehicle loan balance, they’ll demand that you get current within weeks after you file your case. One reason is because for a “reaffirmation agreement” to be legally valid, it has to be filed with the bankruptcy court before the debt is discharged, which happens in most cases about three months after it’s filed. So the lender insists that you get current well before that so that the “reaffirmation agreement” can be prepared, signed, and filed at court in time.

Again, talk with your attorney to find out if your lender is one of the uncommon more flexible ones.

Much Greater Flexibility Through Chapter 13

If you need or want to keep your car or truck but are behind on payments and can’t catch up within a month or two after filing, consider the Chapter 13 “adjustment of debts” option instead of Chapter 7. Chapter 13 may not only give you more time to catch up on those back payments, but may even substantially reduce your monthly payments, the interest rate, and the total amount to be paid on the loan. I’ll discuss these Chapter 13 tools in my next blog post.