I have frequently written about what can happen to a client’s home when filing Chapter 7 or Chapter 13 bankruptcy, but another type of major asset that is of frequent concern for many clients is the car. While a debtor can often catch up on late payments or even get the amount owed on a vehicle reduced through a Chapter 13, a person filing Chapter 7 has three options regarding his or her automobile: reaffirm, redeem or surrender.
Today, I wanted to discuss surrendering your vehicle. This option is often the best decision for debtors who can no longer afford a high monthly payment or whose cars are “underwater,” meaning they owe more than the vehicle is worth. A debtor who surrenders a car, truck or van can benefit immediately by no longer being on the hook for the remaining balance on the loan. This can be especially beneficial for a client who had a high monthly payment that he or she could no longer afford. Furthermore, if the debtor filing Chapter 7 is leasing the vehicle, he or she will not have to pay any penalties for excess mileage or wear and tear by surrendering the car.
Of course, the biggest drawback of surrendering a vehicle in Chapter 7 is that the debtor will have to rely on a different form of transportation. Additionally, surrender will make acquiring a new car more expensive, because the bankruptcy filing will result in higher interest rates and often require having to work with subprime lenders. Many people who file Chapter 7 and surrender their vehicles end up having to settle for automobiles that are less desirable than the ones they gave up.
Another important aspect to note about surrendering a vehicle in Chapter 7 applies to debtors who had cosigners on their loans. This is important, because while the person filing bankruptcy will not be responsible for the remaining balance on a car loan, the Chapter 7 discharge does not apply to the person who cosigned the loan. As a result, the cosigner becomes responsible for the deficiency balance.
There are, however, options that can allow debtors to keep their cars or trucks in Chapter 7, and I will talk more about those avenues in my next post.
Law Firm of Kevin D. Judd – Maryland bankruptcy lawyer