If you are financing your car, you have different options on what you may do with your car in Chapter 7 and Chapter 13 bankruptcy.
In Chapter 7, you have three options:
- Reaffirm the debt. This means you sign a new contract under the same terms of the old contract. Bankruptcy often removes your personal liability on the car loan. Reaffirmation makes you liable for the car loan again, but it also allows you to keep the car.
- Redeem the debt. This means you make on lump sum payment to the creditor equal to the car’s current fair market value. There are credit agencies available that specifically provide loans for these types of lump sum payments.
- Surrender the Car. This is a good idea when you can’t afford the monthly payment or the car is worth much less than what you owe.
There is sometimes a fourth option available where you continue to make payments on the car, but you do not redeem or reaffirm the debt. This is called retain and pay. This option is not always agreed to by the creditor. But even if the car is repossessed, you will not be responsible for any deficiency under this fourth option.
Under Chapter 13, you may elect to surrender the car. If you elect to keep the car, you must repay the entire car loan if they bought a car within 910 days (two and half years) of the bankruptcy filing. If your car was purchased more than 910 days before filing bankruptcy, you may have the opportunity to “strip down” the debt. This is a mechanism that allows you to pay the blue book value rather than the outstanding balance on the car loan(assuming it is lower).