What Happens to Your Car in a Chapter 7 Bankruptcy?
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
If Your Car is Completely Paid For With No Loan
If your car is free and clear with no liens against it, the car’s value becomes part of your estate. In a liquidation bankruptcy (Chapter 7), the Trustee’s duty is to sell property in your estate and distribute the money to your creditors.
Chapter 7 bankruptcy allows you to keep certain exemptions that are not subject to seizure or sale. Both the federal and state exemptions let you shelter a specific value in your car. If your car’s value is less than the exemption amount, or if the portion of your vehicle’s nonexempt value is small, the Trustee will often let you keep your car.
However, if the amount of your car’s nonexempt value is substantial, then you can give your car to the trustee, who will then sell it and give you the amount of the exemption. Or you can pay the trustee your car’s nonexempt value and keep the vehicle.
If You Still Owe Money on Your Car
If you have a loan against the car, you can “reaffirm” your obligation. To do this, you sign a contract with the lender and agree to keep paying on your car loan, which lets you keep the vehicle. Your reaffirmation contract means that you are liable for the debt, regardless of what happens in your bankruptcy.
To reaffirm your loan, you must convince the Trustee that you need the car and that you can keep up the payments as promised. If the Trustee is not persuaded, the bankruptcy court will not agree to your reaffirmation and the lender will take the car.
You May Be Able to Redeem Your Car
Redemption is another way you can keep your car even if you owe money on the vehicle loan.
If you decide to redeem your car, then you must offer to pay the creditor the market value of your car in one lump sum payment. This is true even if the car’s value is less than the amount you owe. The lender and you must agree on the car’s value. If you and the lender cannot agree, then the bankruptcy court will decide.
For Example: Last year Mary filed a Chapter 7 bankruptcy. Then she bought a used car and took out a $10,000 loan. The value that she and the lender agreed to is $7,500. This means Mary can keep the car by paying $7,500 to the creditor. The balance of $2,500 will be erased in her bankruptcy.
Giving Up Your Car
If you choose not to keep the car – or if you cannot stay current on your payments – then you can surrender the vehicle. To do this, you return the car to the lender and the entire balance on your loan is erased by the bankruptcy court. The creditor will have to wait until your bankruptcy case has ended before it can repossess your car. Or the lender can file a motion with the court, asking that it be allowed to take possession sooner.
Should you have any questions regarding how filing a Chapter 7 bankruptcy in Illinois might affect whether you can keep your car in bankruptcy, or to learn whether it would be best for you financially to lose your car in bankruptcy, it is always best to consult with a qualified bankruptcy attorney to better understand your legal rights. For bankruptcy advice in Chicago and the greater Illinois area, Richard Fonfrias offers a free confidential consultation to discuss bankruptcy solutions, foreclosure, debt and credit problems, and other troubling financial matters.