Drive It or Dump It, Part 2: What to Do If the Car is Not Worth Keeping

This article is a follow-up to a previous article regarding the factors to be considered for a consumer who is considering the filing of a Chapter 13 bankruptcy to save a car from being repossessed by the lender.  This article will address the bankruptcy alternatives which may be more desirable if the car is not worth keeping, either because of low value compared to the loan balance, or high mileage.

Both Chapter 7  and Chapter 13  bankruptcies allow for the surrender of an automobile.  In both instances, the lender is permitted to repossess the vehicle and sell it a public or private auction.  The difference between the sale price of the vehicle and the amount owed is known as a “deficiency” claim.  In a Chapter 7 case, the deficiency claim is discharged outright.  In a Chapter 13 bankruptcy, a portion of the deficiency claim may be paid during the duration of the Chapter 13.  Keep in mind that without bankruptcy protection, the lender will pursue the borrower for a deficiency claim.  It is a common misconception that returning the vehicle to the lender “cancels” the debt and makes everything even.

The next issue that often arises is with respect to replacement transportation.  In some circumstances, debtors may have access to a vehicle through friends or family.  Other debtors may set aside the payments that they otherwise would have made on the car loan to pay cash for a replacement vehicle.  I have also had clients use their income tax refunds to purchase a replacement vehicle prior to the filing of a Chapter 7 case, in which they were going to surrender their financed vehicle. [i]  Other debtors may obtain a vehicle financed in somebody else’s name, with the understanding the debtors will drive the vehicle and remain responsible for the payments.  Regardless of how it is accomplished, a debtor will need to arrive at some type of solution for replacement transportation before making the decision to surrender the vehicle.  While bankruptcy attorneys are prohibited from counseling potential clients to acquire debts in anticipation of filing for bankruptcy, they can still make some recommendations regarding the surrender of a vehicle based upon the individual circumstances of your case.

At what point can a discharged debtor finance a vehicle in their own name?  Usually about one year after the bankruptcy case is discharged, regardless of whether it is a Chapter 7 or Chapter 13.  Employment and income will factor into the decision of a lender to provide a competitive car loan.  One benefit of surrendering an upside-down vehicle in a bankruptcy is that the trade-in of the former vehicle will not compound the debt owed on the new purchase.  For instance, if you traded in a car worth $10,000 with a $15,000 loan balance, you have just added $5000 to the purchase price of the new vehicle.  Instead, the discharged debtor can set aside a cash down payment which will actually establish equity in the vehicle from the moment it is purchased.  In this manner, the consumer can acquire affordable transportation and rebuild their credit at the same time.