Filing for Chapter 7 bankruptcy is pretty much the financial equivalent of a get-out-of-jail-free card. Chapter 13 can give you a big breath of relief as well. You can surrender your vehicle in either type of bankruptcy, but you may not want to, particularly if you file Chapter 13.
Tell the Court Your Decision
Debtors are required to file a statement of intention early in both Chapter 7 and Chapter 13 proceedings. This is a document that tells the court what you want to do with your secured loans, those that are anchored by collateral. You must list all your secured debts, even if you don’t want to give up each item of collateral; you may only want to relinquish your vehicle.
Complete the Statement of Intention
The statement, also known as Form 8, asks that you describe each item of property that acts as security for a loan. You must name the creditor and indicate what you want to do with the property. You can find a copy of the form on the U.S. Court’s website. If you want to surrender your car, all you have to do is check the corresponding box. You have 30 days after you file your Chapter 7 petition to submit Form 8 to the court -- or until your scheduled meeting of creditors if you filed for Chapter 13 protection.
Wait to Hear From the Creditor
When you file your statement of intention with the court, you must also send a copy to each of the creditors listed in it, regardless of whether you want to keep or surrender the property. You must also serve a copy on the trustee assigned to your bankruptcy case.
You should hear from your auto lender after it receives a copy of the statement. It might file a motion with the court, asking the judge to lift the automatic stay that immediately goes into effect with each bankruptcy proceeding, so it can repossess your vehicle.
The stay prevents creditors from doing anything to collect from you or to claim collateral, so your lender can’t proceed until the stay is lifted. The creditor might also simply ask you to sign a written consent, then file the consent with the court. The judge will sign an order, allowing the lender to take back the collateral -- your vehicle. The lender can send a repo man to collect it or it might arrange with you to drop off the car at a secure location and turn the keys over to its representative there.
It May Make More Sense to Keep the Car
Chapter 13 is set up to allow debtors to retain property that's secured by loans. This is the form of bankruptcy that allows you to enter into a three- to five-year repayment plan, supervised by the trustee and the court, to pay down your debts. Secured creditors are typically paid in full through your plan. Unsecured creditors may only get pennies on each dollar owed to them. How much they receive depends on how much extra money you have after paying your regular living expenses each month. The more disposable income you have, the more your unsecured creditors get paid, up to the amount you owe. You can continue to make your car payment outside your Chapter 13 plan and if you owe any past-due payments, these can be included in your repayment plan.
If you keep your car in Chapter 13, it remains a secured debt. If you decide to give it up, it becomes an unsecured debt.
You Can Cram Down the Loan in Chapter 13
You might be thinking of giving up your car because it’s underwater: The loan against it is more than the vehicle is worth. Chapter 13 offers a nifty way out of this dilemma, called a cram-down. With the approval of the bankruptcy court, you can reduce the balance of the loan to whatever the vehicle’s fair market value is at the time you file for bankruptcy. For example, if your car is worth $10,000 but you still owe $15,000, the court can reduce or cram down the loan to only $10,000, the replacement value of the vehicle. Your interest rate may drop as well. The court decides how much interest you pay based on a variety of factors, including where you live, and it’s often lower than the rate you contracted for when you purchased the car.
If you jump the gun and surrender your car before you file for bankruptcy, it will appear on your credit report as a repossession, in addition to the bankruptcy showing up there. Your credit will take a double hit. If you surrender it as part of your bankruptcy proceedings, the repossession won’t show.
You may not find it easy to get another auto loan after your bankruptcy discharge, at least not one at a reasonable interest rate. You’re not required to relinquish your car in the proceedings, so give serious thought to this decision, especially if you have no other means of transportation.