Declaring bankruptcy can be extremely stressful, especially as you wait for the bankruptcy proceedings to finish. A Chapter 7 only adds to that stress, as you must decide what to do with your various debts. When it comes to your car, how you should proceed is determined by whether you own, lease, or are making payments on your car.
What if You Own Your Car?
A Chapter 7 bankruptcy handles your debts differently than a Chapter 13. Unlike the payment plans associated with a Chapter 13, the Chapter 7 settles all of your debts by selling your assets. The court appoints a bankruptcy trustee to review your assets and decide what to sell. If you own your car, it joins the list of assets for selling. Fortunately, there is a loophole called an exemption. The exemption is a dollar amount that protects a portion of your assets. Therefore, if your car is worth less than the exemption, the trustee will not sell your car.
You're Making Payments; Now What?
If you are making payments on your car, whether it's as a lease or to own, you have two basic options. You can surrender your car or you can reaffirm the loan. Assuming you want to keep your car, you will need to say this on your initial Statement of Intention. Just because you want to keep paying on your car does not mean you are stuck with the same terms. You should try to renegotiate the terms, lowering the amount you will pay. The reason is that the lender knows that you can still surrender the car. After all, the car payments are part of the reason you are stuck.
Why Should You Surrender Your Car?
There are times when walking away from your car makes better sense in the end. Consider a typical lease. There are penalties for damage and for high mileage. If you have one or both on your current lease, surrendering the lease means that you don't have to pay those penalties. Considering that when the lease is up, you don't own the car, this is a smart financial decision. If you have tried to renegotiate your car loan and your lender won't change the terms to something more reasonable, surrendering is a smart decision. You don't want to let a large car payment dig you back into the hole that bankruptcy is getting you out of.
When you are filing a Chapter 7 bankruptcy, it is entirely possible for you to keep your car. However, think about it, because in some cases, surrendering it can be a better decision. Laws and exemptions vary from state to state, so if you have any questions, consult a local bankruptcy lawyer like Dunn Greg Bankruptcy Attorney.