Will You Lose Your Vehicle When Filing For Bankruptcy?

People often have questions about what happens to their personal property when they file for bankruptcy. More specifically, they want to know what will happen with their car. Will they be able to hold onto it, or will it need to be liquidated to pay for debts? Here is what can happen to your vehicles during the bankruptcy process.

Surrender The Vehicle

When you surrender the vehicle, you are essentially giving the car up so that you can include it as a discharge with all of your other debts. This is not always the best thing to do in some situations, but it could work well for you. Surrendering the vehicle works when you still have a large principal balance left on the vehicle, and you don't want to be stuck with a huge car payment for a vehicle you cannot afford. 

The way surrendering the vehicle works is that it's repossessed by the lender that you borrowed the money from. You would lose all of the principal that you've paid into the vehicle, but the remaining debt is discharged. 

Redeem The Vehicle

Redeeming the vehicle is not something that some people are able to do since it involves giving the lender a fair market value of the vehicle's worth to pay it off. This option is often used when the vehicle is underwater, which means that the vehicle is worth less than what you still owe on it. This is the case when buying a new vehicle that loses a lot of its value the moment it is driven off the lot.

It is also a good idea to redeem the vehicle if you are very close to paying it off. Rather than lose all the equity you have in the car due to the bankruptcy filing, you can put money aside to pay the vehicle and own it. The nice thing about this option is that your payment isn't subjective to being clawed back as a preferential payment. 

The problem with redeeming the vehicle is that it requires that you give the entire value of the vehicle to the lender as a lump sum. You cannot keep making monthly installments, which is why many people can't do it.

Reaffirm The Vehicle's Debt

Reaffirming the debt means that you continue to make monthly payments on the vehicle, even though you are going through bankruptcy. This gives you the ability to keep your car, but you won't be able to discharge the debt after the bankruptcy is finished either. This is problematic for those people that end up falling behind on their car payments a year or two down the road after the bankruptcy is finalized. 

Contact a bankruptcy attorney for more information.