What Happens to a Car I Owe Money on if I File a Chapter 7 Bankruptcy? (Part 1)

by Douglas Jacobs, Esq.

September 5, 2007

Often when you file bankruptcy, you will owe money on your car.  And you want to keep it.  There are several ways to do this even in a Chapter 7 Bankruptcy.

It used to be, before the new bankruptcy law went into affect in October 2005, you could simply continue making the payments on the car and nothing would happen. You kept the car as long as the payments were current.

Under today’s law, however, you must redeem, reaffirm, or surrender the car. A redemption is the payment of either the amount owed or the fair market value of the car, whichever is less. Either way the debt is satisfied and you keep the vehicle.  Even if the creditor is owed more than the value of the car, the difference will be discharged with your other unsecured debts in the bankruptcy. The problem is that you need cash to do this.  Thus, if your car has a fair market value of $10,000 but you owe $15,000, all you need to do is to pay the $10,000.  Of course, if you had that kind of cash lying around, you probably wouldn’t be filing for bankruptcy in the first place. There are companies that will help you do this: redeem the vehicle for cash and have you make payments to them.  Usually the interest rate can be higher than you were paying, but the amount owed on the car is the fair market value often much less than what was owed.   (See the excellent post on this by my colleague, L. Jed Berliner.)

In Part 2, we will examine reaffirmation agreements.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.

Last modified: March 6, 2012