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How does Surrendering a Vehicle in a Bankruptcy Work? Can I get Rid of the Debt if I Give it Back?

Bankruptcy is usually considered a last resort due to its severe impact on your creditworthiness and future borrowing needs. However, it may be the best option for those who need to get rid of debt.

There are several reasons why you might consider surrendering your vehicle in a bankruptcy. The monthly payments could be too high or you may be several months’ behind on them. There could also be excessive wear and tear on the vehicle to the point where it no longer runs well, if at all.

Before you decide to give up your vehicle, it’s important to understand how bankruptcy works and the different ways to go about surrendering your vehicle.

How does bankruptcy work?

There are two main types of personal bankruptcy: chapter 13 and chapter 7.

Chapter 13

In a Chapter 13 bankruptcy, the debtor (person filing) creates a three- to five-year repayment plan and sends it to the court for approval. This plan is based on the debtor’s income and how much they can afford to pay. If approved, any creditors must also acknowledge and accept the plan.

A Chapter 13 also allows the debtor to reduce the balance they owe and their interest rate on the vehicle loan. If they choose to do this, and if they prove their ability to make on-time payments, they can keep the vehicle.

Chapter 7

In a Chapter 7 bankruptcy, all unsecured debt (credit cards, medical bills, etc.) is discharged or eliminated. With a Chapter 7, the debtor may be able to keep the majority (if not all) of their property, including their vehicle. This usually happens when the debtor is caught up on their auto loan payments and can prove their ability to continue making payments once the case is over.

That said, there are times when it’s better to surrender a vehicle, such as when the debtor cannot make payments or the vehicle is worth less than is what is owed.

What happens to your vehicle in a bankruptcy?

When you file for bankruptcy, there are three options for what happens to an existing car loan.

  • Surrender
  • Redemption
  • Reaffirmation

Each of these options comes with its own advantages and disadvantages.

Surrender: Surrendering a vehicle means giving it back to the original lender. In most cases, this means erasing the remaining debt from the auto loan. This can be a good option for those who are looking for a fresh start or who need to reduce their overall monthly payments.

Redemption: Instead of paying back the full amount of the loan, the borrower pays the fair market value of the vehicle in a lump sum. This is often the best option for those who owe more on the vehicle than it is worth. However, if the borrower needs to take out a loan to make this payment, they must be prepared to pay back the loan after the bankruptcy is discharged.

Reaffirmation: In reaffirmation, the borrower maintains personal liability for the auto loan. This means they agree to make regular, on-time payments. If they are unable to make payments, the lender may repossess the vehicle and put it up for auction. The borrower is then responsible for the deficiency balance, or the difference between what it sells for and the remaining balance due on their loan.

How to surrender a vehicle

If you choose to surrender your vehicle, you need to let the court and the lender know of your intention when you file for bankruptcy. You can do this with a Statement of Intention, which is a legal statement in which you indicate which assets or property you wish to keep and which ones you wish to give up.

When you file for bankruptcy, the court will place an automatic stay that prevents creditors or lenders from contacting or harassing you during the case. If the lender does not agree with your decision to surrender the vehicle, however, they have the right to file a motion with the court to lift the automatic stay.

If the court lifts the stay, the lender may repossess the vehicle. At that point, the lender will put the vehicle up for auction to try to get the greatest value from it. Regardless of how much the vehicle sells for, the court will then clear any remaining debt related to the vehicle.

Pros and cons of surrendering a vehicle

While surrendering a vehicle is often the best option in a bankruptcy, it should not be taken lightly. Here are some pros and cons of going this route.

Pros:

  • Surrendering a vehicle in a bankruptcy can be a huge financial relief to those who are unable to make on-time payments or who are already behind on their loan.
  • Without a vehicle loan (and the required car insurance), the overall monthly expenses will be lower. This could make it easier to pay for other bills and essentials.

Cons:

  • The lender may refuse to take the vehicle back, especially if it is worth much less than what is still owed. This can be tricky to get out of and may require an attorney or additional legal action.
  • It can be difficult to get financing on a new vehicle after the bankruptcy case is discharged. Even if financing is available, interest rates may be sky-high. Usually, the borrower must wait to finance a new vehicle until the court releases a copy of the bankruptcy discharge. In some cases, this could take a couple of months.
  • If there is a cosigner on the loan, they will still be responsible for the remaining balance on the vehicle after it’s sold at auction.

Can you get rid of all your debt by filing for bankruptcy?

Ultimately, it depends on the individual case, the type of debt and whether it is a Chapter 7 or a Chapter 13 bankruptcy.

For many people, bankruptcy offers protection from a potential lawsuit or the loss of property or other assets. However, bankruptcy does not automatically get rid of all debt. In a Chapter 7, for example, secured debt like income taxes, child or spousal support, and most student loans will remain even after the case is closed.

If you’re considering bankruptcy or debating about surrendering your vehicle, consult a qualified bankruptcy attorney to discuss your options.

 


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