I need my car. Can I keep it if I file for Chapter 7 bankruptcy?

Potential clients in my Asheville NC bankruptcy  practice almost always ask about options for their car.
If you file a Chapter 7 bankruptcy case, and currently owe money on your car, you are entitled under the Bankruptcy Code to reaffirm, redeem, or surrender the car.  Most frequently, however, I advise clients to consider a 4thoption, “retain and pay,” which is a practical solution not authorized by the Code.

Make the smart choice


You are entitled to reaffirm a car loan under the bankruptcy code.  Car lenders must provide their clients who have filed for Chapter 7 the opportunity to sign a “reaffirmation agreement” which usually keeps the terms for the car loan in place.  Occasionally, lenders will agree to improve the terms.  In either case, a Chapter 7 client can use this right to keep their car at the same terms prior to filing their Chapter 7 case.


If you owe considerably more on the car than it’s worth, the bankruptcy code authorizes you to make a one-time payment to the car lender for the amount the vehicle is valued at the time of filing the Chapter 7 petition.  Most people who can be helped by a bankruptcy case will need to take out a redemption loan in order to execute this plan, and several banks in Western North Carolina specialize in this type of financing.


If your car payment is killing your budget, and you need to move on to something less expensive, you can ‘surrender’ the car back to the lender and eliminate your liability on your old car loan.  This also works for cars which have been repossessed where you owe a deficiency balance.

“Retain and Pay”

Most of the time, I recommend my clients choose none of the three options referenced above and authorized by the bankruptcy code.  By keeping your car, and continuing to make payments, most car lenders will allow you to keep the car (Ford Motor Credit and Credit Unions are the primary exceptions) without signing the reaffirmation agreement.  Car lenders do this because they want your money, not the car you’re driving around.  With this practical strategy, you can still keep the car and make all the payments, and if you pay it off, you will have a free and clear title as you normally would.  However, if you need to replace the car for any reason (wears out, breaks down, etc.) before paying the loan off, you will not be obligated to pay back that car lender.  Instead, you can simply instruct the lender that you are giving them the car back, and that will end your liability on the car loan.  This can save tons of money years after your bankruptcy case is over when you do not need to roll over the underwater portion of this car loan into your next car loan.

Bankruptcy clients have options with regard to keeping their cars in Chapter 7.  By planning carefully, we can choose the option which works best for the specifics of your situation.  If you live in Western North Carolina, I would be pleased to sit down with you for a free, initial bankruptcy consultation.

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