Filing Chapter 7 bankruptcy can affect your car loan in a few different ways. If you still owe money on the vehicle, the bankruptcy may discharge your personal liability for the debt, but the lender’s lien usually remains on the car. That means you may be able to keep the car, redeem it or surrender it, depending on your situation.
Can you keep your car and continue making payments?
One option is reaffirmation. A reaffirmation agreement lets you keep the car and stay individually responsible for the loan after bankruptcy if you and the lender follow the bankruptcy rules.
You do not have to reaffirm just because you want to keep the vehicle. If you do choose this option, you generally must sign and file the agreement before your Chapter 7 discharge. If you have an attorney, the agreement may become effective upon filing if you meet the bankruptcy requirements. If you do not have an attorney, the court usually must approve the agreement.
Because reaffirmation keeps the debt alive after bankruptcy, make sure you can afford the payments before signing.
Can you redeem the car and keep it?
Another option is redemption. Redemption may let you keep the car by paying the lender the vehicle’s allowed secured claim, usually basing the payment on the car’s value rather than the full loan balance, if you meet the statutory requirements.
This option usually requires a lump-sum payment, so you may need cash or outside financing to use it.
What if you surrender the car?
If you do not want to keep the vehicle or can no longer afford it, you may surrender it to the lender. In many cases, Chapter 7 may discharge your personal liability for the loan, which generally means the lender cannot continue collecting the debt from you personally. The lender may still have the right to repossess the car because its lien usually survives bankruptcy.
How does Florida law affect the answer?
Florida law allows debtors to exempt a limited amount of equity in one motor vehicle. This exemption may protect some of the car’s value in bankruptcy, but it does not eliminate the lender’s lien. If you finance the car and owe more than the exemption protects, you will still need to choose between reaffirming, redeeming or surrendering the vehicle. But the exemption alone does not let you keep a financed car without also addressing the lender’s lien.
Whether reaffirmation, redemption or surrender makes sense depends on how much you owe, what the car is worth and what you can realistically afford after bankruptcy. Florida’s vehicle exemption rules may also factor into your decision. Going through these details before you file gives you a clearer picture of what to expect.
