Can You Surrender Your Car After Bankruptcy If You Don't Want It or Can't Afford It?

What happens if you want to give up your car after bankrutpcy?

Image source: Flickr Creative Commons User Bill Debevec

If you have a car with a loan and you're completely current on the monthly payments, it's very likely that you can keep it. But what happens if you file bankruptcy, keep the car but then decide you can't afford it, it breaks down or you lose your job and can't pay the bill? If any circumstance makes it so that you can't keep or don't want the car anymore and you're still making payments, you can still enjoy some of the protections of bankruptcy, even if you've already filed.

What Can Happen to Your Car Loan During Bankruptcy

Here's why – once you file bankruptcy, you get debt protection. If you quit making payments, the lender can (and will) repossess the vehicle. But if you don't want it, that's no big deal. But it's what they can't do after this that's important. First, they can't come back and try to collect the difference between the loan value and value of the car because your bankruptcy filing will cover this debt. Second, they can't put a ding on your credit.

When you file bankruptcy, your credit report reflects the bankruptcy filing but then creditors can't make any other notations after that. Even if you were making on-time payments on your car after the bankruptcy, your credit report won't reflect this (you may think it's not fair, but it's just the way that it is). But this also means a creditor can't post a repossession on your account if you decide you don't want to keep the car. Your credit report should look the same either way.

How Does a Reaffirmation Agreement Change Things?

This protection will not apply if you sign a reaffirmation agreement. A reaffirmation agreement acts essentially like a brand new loan that you took out post-bankruptcy. It's an agreement that you still owe the debt, still have the car and will continue to make payments or face repossession and negative items on your credit report. Some people execute reaffirmation agreements because their lender requires them to do so or surrender the car.

Most car loans come with lengthy contracts and terms and conditions that most people likely don't read. (Who would beyond the amount of your principal, interest and payments?) In the fine print is information about what happens to the loan if you file bankruptcy. There will typically be language that says if you become insolvent, they retain the right to take the vehicle back even if you're current.

This may come as a shock to you, but it's absolutely true. Often, even when debtors are struggling to pay their bills and may be skipping house and credit card payments, they'll still make their car payments because they need the vehicle to get to work and keep earning a living. Faced with this, many consumers will often go ahead and execute the reaffirmation agreement.

If you have another option - enough cash to buy a cheap used car or a vehicle you can borrow until you can buy one, it's often better for you financially to do this than sign a reaffirmation agreement. To find out more about your options to deal with past-due debts contact the law offices of John T Orcutt to see if you're a good candidate to get a financial fresh start from Chapter 7 or Chapter 13 bankruptcy.