For the vast majority of individuals, owning a car is an absolute necessity, so it's no surprise that one of the foremost thoughts in the minds of many people that intend to file for bankruptcy is whether they can keep their cars. When you file either a Chapter 7 straight bankruptcy or a Chapter 13 payment plan case, you'll be able to structure it so that you can keep your vehicle.
Your first option in a Chapter 7 case is to enter into a reaffirmation agreement with your car lender. If you own your car free and clear, this option does not apply to you. A reaffirmation agreement means that you contract with the lender to take the car loan out of the bankruptcy altogether. It won't be subject to the bankruptcy discharge, and in exchange for keeping the car, you have to continue making the payments. It also means that the lender could repossess the car and sue you for a deficiency judgment if you default on the loan.
Contact your car lender if you wish to pursue a reaffirmation agreement. A reaffirmation agreement must be approved by the bankruptcy court, and they generally won't approve it if the lender does not reduce the interest rate or principal balance of the loan. You also have to show that you can afford to make the payments, which can be difficult to do if your bankruptcy paperwork shows you don't have enough disposable income to cover the amount.
Motion to Redeem
In Chapter 7, you also have the option of purchasing your car outright from your lender at the retail value of the car at the time your bankruptcy is filed. This may be a good option if the value of your car is much lower than the amount of your loan. To qualify for redemption, the car must be used for personal, family, or household use, and you must pay for the car in one lump sum payment.
You must file a motion to redeem with the bankruptcy court according to its rules of procedure, including serving the motion on your car lender and provide evidence to the court of the current retail value of the car. If the court agrees, it will grant your motion and order the car lender to accept a lump sum payment. Upon payment, the lender will transfer title, free and clear, to you. Filing a motion can be complicated, and it's recommended that you consult a bankruptcy attorney if you are considering this option.
Pay and Drive
Pay and drive is an option that does not legally exist anymore—at least technically. This option was eliminated with amendments to the Bankruptcy Code in 2005; however, it remains viable for many individuals. If you do not redeem your car or enter into a reaffirmation agreement, you can continue to make your monthly payments to your car lender, but because of the bankruptcy discharge, you are no longer obligated to do so. As a result, and after you receive your discharge, the lender can repossess your car at any time, even if you are making payments. Very few lenders will do this as they would prefer a constant stream of payments versus the risk of a low price for an auctioned repossessed vehicle. Just make sure to keep your payments current.
Owned Free and Clear
If you own your vehicle free and clear of any liens, then you must be sure to protect your car from the bankruptcy trustee, which requires claiming exemptions on the Schedule C to cover the value of the car. Any value of the car that you do not claim as exempt, the trustee can seek by selling your car and paying you your share. Although you would get a payment from the trustee, you would lose your vehicle.
Chapter 13 Repayment Plans
If you file a Chapter 13, you can continue making your payments according to their terms, or add the payments into your payment plan. If you owe more than the car is worth, or if your interest rate is high, you can alter the terms by paying only what the car is worth and at a reasonable interest rate over the length of the plan, usually 3–5 years. This is called a cramdown, and it's used every day to help people like you keep their cars despite filing bankruptcy.