You rely on your car for work and family errands. When payments are hard to manage, Chapter 7 bankruptcy may offer relief. But would filing put your car at risk?
Filing usually stops repossession for a time under the automatic stay. But the lender keeps its legal claim on the car, even if the court later clears your debt. You generally have three choices: reaffirm the loan, redeem the car or surrender it.
1. Keep paying through reaffirmation
Reaffirmation means agreeing to keep paying the car loan after bankruptcy. You and the lender sign before discharge and file the agreement with the court. Federal rules apply, and some agreements require the judge’s approval. You may cancel until your discharge or 60 days after filing the agreement, whichever comes later.
If you miss payments under a valid agreement, the lender could repossess the car and try to collect what remains after the sale. Texas law bars garnishment of your current wages for car debt, though other collection methods remain possible.
2. Pay the car’s value through redemption
Redemption allows you to keep an eligible vehicle by paying what it is worth, under bankruptcy rules, in one lump sum. That amount reflects the car’s retail replacement value, based on its age and condition.
If you owe $14,000 and the car’s value under those rules is $9,000, you could redeem it for $9,000. An exemption must protect the car, or the bankruptcy trustee must give up the right to sell it. A judge may resolve a dispute about its value.
3. Return the car through surrender
If payments no longer fit your budget, you could surrender the car. The lender may sell it and apply the proceeds to your debt.
If the sale falls short, a Chapter 7 discharge may clear your personal duty to pay the rest. You lose the car and must arrange another way to get around.
Choosing what works for you
You may want to compare your car’s value with the loan balance. It might also help to weigh the monthly payments against other travel costs. That can help you weigh your options for debt relief.
