It is important to understand how a Chapter 7 bankruptcy will affect your car ownership, particularly if you have a car loan. The first thing you have to decide, however, is whether you want to keep your car, or if you would prefer surrendering it. The rules generally are that if you have been unable to make payments on your vehicle, and the value of it is lower than your state’s predetermined exemption amount, then you can generally keep it. If you are not behind on your payments, the rules are different. Regardless, you must always start by filing a Statement of Intention (SOI).
If you decide that you want to walk away from your vehicle, you will lose all liability for future payments. If you have been making regular payments on your vehicle and wish to keep it, then you must continue to make those payments. However, once your bankruptcy is finalized, you will have to either pay off the vehicle, or start a new contract on the remaining value (reaffirmation agreement). In most cases, lenders will simply continue to accept your regular payments, which means they have accepted your reaffirmation agreement. Do make sure you check with your lender whether this has actually happened. You should do this as soon as you have decided to file for Chapter 7, as it will also help you to complete the SOI correctly. Do consider carefully whether you want to reaffirm your contract. After all, you can get any remaining finance wiped off by simply surrendering your vehicle.
However, in most cases, people would prefer to keep their vehicle, which means negotiating a reaffirmation agreement. Once you indicate this on your SOI, the lender will write to you with the new terms of your contract. You do not have to accept this at face value, as you are able to negotiate and aim for a better deal. Remember that you hold all the cards here, since you can also surrender your vehicle, in which case the lender gets nothing. Don’t be afraid to push for a much lower payment or even a reduction in the principal. You never know, and the worst outcome would be for the lender to say no. If they do disagree with your proposal, they will send out a counter-offer and you can either agree to that, or you can continue to negotiate some more. Finally, the court has to agree to the new terms in your reaffirmation. Generally speaking, this doesn’t pose a problem, unless you have negotiated very poor new terms.