You can keep your wheels despite filing bankruptcy.
What you must do to keep the car depends on whether you owe money on it and whether it has value greater than the debt and any exemption you can claim in a vehicle.
Will the trustee take the car?
If there is no equity in the car, after subtracting any car loan and exemption from the car’s present sale value, the bankruptcy trustee will not take the car.
If there is equity in the car over and above the value of the exemptions available, a debtor can usually buy any unprotected equity from the Chapter 7 trustee.
Will the creditor take the car?
If you still owe money on it, you can choose to reaffirm the debt to the secured lender, keep the car, and continue paying under the existing terms.
With some lenders, you don’t even have to reaffirm the debt: you can keep the car if you continue to make the payments called for in the contract.
You have another choice: you can buy the car from the secured creditor in a single payment for its present value (redemption). If you can’t agree on the present value, the bankruptcy judge will hold a hearing and determine what the value of the car is.
There are lenders who make a business of making loans to people in bankruptcy to redeem cars. The interest rates are high, but may be worth it if there is a big difference between the balance on the car loan and the car’s current value.
Surrender is an option
If you choose, you can surrender the vehicle and be free of any obligation to pay for it.
After all, bankruptcy is a chance for a fresh start, and perhaps that includes freedom from a lemon or a gas guzzler.
Image courtesy of Sam Bald.