The vast majority of consumers file for bankruptcy under Chapter 7 or Chapter 13. Chapter 7 bankruptcy allows the court to sell any item that is not exempt under the bankruptcy laws and to distribute the proceeds from that sale to the debtor’s unsecured creditors. Chapter 13 requires debtors to make monthly payments to pay down the debts owed. The Chapter 7 process takes approximately 90 days to complete, while the Chapter 13 process typically takes between 3 and 5 years. At the end of both processes, all but certain legally excepted debts will be discharged. Since Chapter 13 involves paying down debts, you are most at risk of losing your car under Chapter 7. However, there are some ways of holding onto it.
Surrender or Redemption
If you have a loan on your vehicle, with little or no equity, you could simply decide to stop paying and give the car back to the lender. This is called “surrendering.” However, if you want to keep the car and can afford it, you can buy the car from the auto lender for the current fair market value of the vehicle. This is called "redemption." To redeem a car, the you must have used the car for personal reasons rather for a business purpose.
Reaffirming the Car Loan
If you have been keeping up with loan payments and want to keep your car after bankruptcy, you may choose to reaffirm the loan. In this case, you agree to continue paying off the loan after the bankruptcy process concludes.The lender must agree to reaffirming the loan, and if you fail to make timely loan payments, the lender may then repossess the car.
Whether or not you take action to keep your car under Chapter 7, the trustee may not end up selling it in bankruptcy under certain circumstances. If the balance of your car loan is more than the car is actually worth, the trustee will not take your car because selling it would not bring in enough to pay off the loan. Most state bankruptcy laws also allow for certain vehicle exemptions. Exemptions protect equity rather than the total value of the asset, so the exemptions for cars apply whether or not you have a car loan. If your car is worth more than the loan balance, or you own the car outright, whether the trustee would sell the car depends on the exemption. Let's say the vehicle exemption is $3,000. If the amount of equity you have in your car is greater than $3,000, the trustee might take the car, sell it and use the proceeds to pay creditors. If the amount of equity was less $3,000, the trustee would not take the car because it fell under the exemption.
Abandonment is one possibility when you have no loan on the car. A trustee can abandon a nonexempt asset if the trustee believes that the time and expense of seizing and selling an asset would outweigh the benefit of doing so. For example, assume that your car is worth $5,500, and there is no car loan on it. Assume further that the exemption amount for the car is $5,000, meaning that if the trustee sold the car, the trustee would have to deliver $5,000 back to you, with only $500 remaining to pay creditors. In this example, the trustee might decide that it is not worth the time and expense of selling the car to generate such a small amount of money. If this were the case, the trustee would likely abandon the car, meaning, the trustee would allow you to keep the vehicle.