3 Options for Car Loans in Chapter 7 Bankruptcy

It is common for individuals to be “upside down” on their car loan. This means that they owe more on their vehicle than what the car is worth. If this is your situation, a Chapter 7 bankruptcy may benefit you:

In a Chapter 7 case, the debtor has three basic options for his/her car loan.  Below is a summary of each:

  • Surrender the vehicle. If you can find alternative transportation, you can surrender the vehicle back to your lender and discharge the debt associated with it.  It is typically difficult to be without a care, so this option may not be desirable.
  • Redeem the vehicle. If you want to keep your vehicle, pursuant to 11 USC §722 you can repay your lender the remainder of the car’s fair market value in a lump sum.  This option works for debtors who are upside down on their car loan, but they have enough cash to pay the car’s value less whatever sums you have already paid.  It is rare that a debtor can afford this option.
  • Reaffirm the loan. A debtor can enter into a new contract with the creditor called a “reaffirmation agreement.”  It is important for a debtor to understand that by reaffirming the debt, the debt is removed from the bankruptcy process and not discharged.