What to do with your car is an important decision when filing any bankruptcy. Should you keep it, or should you walk away? Chapter 13 bankruptcy can be used to save a car that is in arrears, even a car that has been repossessed (up to the moment of auction sale), by catching up the payments over a 3-to-5 year plan. This is great for situations where you temporarily fell behind, but need the car. However, there are also situations where a debtor will want to walk away from a car in bankruptcy, and the law provides this option as well.
A car can be surrendered in Chapter 7 bankruptcy by declaring it as such in the "Statement of Intentions". The Statement of Intentions is served on the finance company, and quite literally states your intentions. A surrendered vehicle will then be returned to the finance company, with the details usually worked out between the debtor and the company.
What is the advantage to doing this? In situations where the car is worth far less than what is owed, usually as the result of refinancing, it can be returned without the debtor facing any future obligation, even if the finance company sells the car for far less than is owed. The $10,000 you owe on your $1,000 Ford Fiesta that barely runs any longer doesn't need to drain your monthly budget any longer. You can give back the under-performing car and wipe out your financial obligation in bankruptcy.
This is also a great way to return a vehicle that no longer runs, or was severely damaged in an accident. Once again, a lemon or damaged car can be surrendered and returned without any further financial obligation. I often have my clients sit down and determine what their car is actually worth to them in its current condition, given their financial state.
What is the downside to surrendering your vehicle? Well, obviously you will no longer have a vehicle (of course!), and if someone can't help you finance or purchase a replacement, it may be difficult to do so on your own right out of bankruptcy. You will want to make sure you have a plan, otherwise it may make sense to keep a vehicle that is over-financed... sometimes an unfavorable car payment is better than no car at all, if it gets you to work, and school, and the grocery store, etc.
Vehicles can also be surrendered in Chapter 13 bankruptcy, but whether or not doing so is a good idea may depend on whether or not your are required to repay unsecured creditors in your Chapter 13 plan. A surrendered vehicle in Chapter 13 bankruptcy will become unsecured debt. If you are required to pay back your unsecured creditors in full, it may not make sense to surrender your vehicle.
If you are considering getting rid of an unwieldy vehicle, contact us to schedule a free consultation to determine your best route through bankruptcy.