Keep the Car In Chapter 7 Bankruptcy: What Are your Choices?
When you file Chapter 7 bankruptcy, you are “in the drivers seat” with some choices on how to keep the car.
One choice is to give it back.
One choice is to give it back. Especially if you have a terrible interest rate on the car—and if you can put your hands on a junker—give them the car back. You are supposed to give the car back six weeks after you file your bankruptcy case. That gives you time to figure out another way to get around.
(Finding another way to get around is NOT going out and financing a car right after the bankruptcy. You’ll find car dealers eager to put you in a car at 24%—that gets you right back into financial trouble. But if you have a friend or family member who can give or lend you a car for a year or longer, you can then find some good financing deals. You can read about Alice, who got a 4.76% a year after bankruptcy. People who have a friend or family member who knows a lot about cars, also have good luck buying a car for cash, through a site like EBay.)
You can keep up the payments and keep it
Except for the special problems with Ford and Credit Unions, you can keep up the payments and keep your car. For most people, this is the best choice. No paperwork is required, you just need to be sure to make the payments on time. If you get late, they won’t call and yell at you. (That would violate the bankruptcy discharge.) They will just come and get the car.
Since they don’t want to violate the bankruptcy law, most car finance companies will stop billing you. You need to pay them on your own. Honda Financial Services has a good set of instructions. And here are sample instructions from USAA. Making the car payment will be like paying the rent—you gotta remember.
You can redeem your car.
If you owe more than your car is worth, but really like your car, you can redeem it. You can keep the car by just paying the book value. (Book value under the 2005 law is what you’d have to pay to buy it.) There are some honest lenders who will finance that straight out of bankruptcy. One we use is called 722 Redemption. If you know your car is in good shape, this can be the way to go.
But you now have an after bankruptcy car loan. If you pay it, you are building up good credit. If you don’t, you are building up after-bankruptcy bad credit. You really don’t want after-bankruptcy bad credit.
You can keep up the payments and change your mind later.
Suppose a year later, your car has mechanical problems. You can change your mind and give it back.
The good thing about keeping up the payments is, down the line you can change your mind. Suppose a year later, the car has mechanical trouble. You can give it back without owing anything and without damage to your credit.
Suppose a year from now, your uncle offers you his car. You can give the old one back, without owing anything and without damage to your credit.
Suppose two years from now, your credit union will offer you a car loan at 3.9%. You can give the old one back, without owing anything and without damage to your credit.
People often ask me, how long do I have the option to give the car back? My answer: Until it’s paid for. Once it’s paid for, you can’t give it back.
Is there any paperwork? None. Just call and tell them to come and get it. Or, stop paying and they will come soon enough.
Can I keep the car without making the payments?
The short answer is, No, you can’t keep the car without making the payments.
At least, you can’t keep the car–unless the car finance company never bothers to come any get it. Sometimes they never bother. If the car will bring good money at a car auction, they are going to come and pick it up. But recently, a couple of people have told me nobody ever came and got their cars. Those were cars with about a hundred thousand miles on them–not junkers. But the credit union, in both cases it was a credit union, never picked them up.
So, you might get lucky.
Can I reaffirm the car loan?
The car loan people want you to reaffirm—because it benefits them, not you. When you call, they will tell you your lawyer should have reaffirmed—because it benefits them, not you.
Under the law, the judge will not approve a reaffirmation, unless I sign off that it’s a good idea.
I don’t think it’s a good idea. So I’m not signing off. So the judge is not approving it. (The judge can, and often does, turn it down even if a lawyer signs off. Which I don’t.)
I explain more on that, here.