When a consumer files for Chapter 7 bankruptcy, their non-exempt property is liquidated. The money from this liquidation goes to the filer's creditors. However, any unsecured debt that remains is wiped away, free and clear.

Chapter 7 can give a heavily indebted consumer an opportunity to get a fresh start with their finances. Of course, the downside is that it will also leave the filer with heavily damaged credit. There is also the question of what happens to the consumer's vehicle after Chapter 7 bankruptcy is filed.

Keeping or Surrendering a Vehicle in Chapter 7 Bankruptcy

Chapter 7 Bankruptcy

In the easiest situation, a Chapter 7 filer's car is already paid for and the value of the car is below the state's exemption limit. Here, the vehicle would simply be retained by the consumer, no questions asked. But, on the other hand, if money is still owed on the car, everything gets more complicated.

If the person filing for bankruptcy is still paying on an auto loan, they can choose to either keep the vehicle or surrender it to the lender. When a car is surrendered in Chapter 7, the filer is not responsible for the loan after the bankruptcy is discharged.

The same is true with a lease contract. If a lessee goes bankrupt and decides to give up the leased car, they can hand it over and walk away. No matter where they were in the contract, they will no longer have any obligations toward the lessor.

If a consumer decides to keep a car that they're still paying on after filing a Chapter 7 Bankruptcy, they have a couple of options.

Redeeming a Car in Chapter 7 Bankruptcy

A car can be redeemed in Chapter 7 whether or not the payments are current. With the redemption option, the lender is paid the current value of the vehicle in one lump sum. It's important to note that the vehicle owner only has to pay the amount of the car's current value. So if they are upside down in the vehicle, the remainder of the loan balance will be waived.

If a bankruptcy filer has enough money to redeem their car, this can actually be a pretty good deal for them. Even if they owe the lender thousands more than what the vehicle is worth, they won't be responsible for paying this difference.

Entering into a Reaffirmation Agreement with the Lender

If a bankrupt consumer can't afford to redeem their car, or are behind on their payments or both, they can enter into a new contract with the lender. This is called a reaffirmation agreement, and the terms of this agreement are negotiable.

In the case of a car owner having missed payments, these payments can be included in the new agreement. Or, if the bankruptcy filer hasn't missed any payments, the reaffirmation agreement can be made to resemble the original loan contract. However, the consumer is advised that they can and should negotiate for a better deal.

Because a Chapter 7 bankruptcy filer has the option to surrender the car and walk away, the lender stands to lose a lot of money. So it is in the lender's best interest to bring the loan balance down to the vehicle's current value.

Of course, the lender won't automatically volunteer to do this for a consumer. The filer will need to ask if it's an option. And if the lender refuses to negotiate, the bankruptcy filer may seriously want to consider surrendering the vehicle and walking away.

Once a reaffirmation agreement is reached, the new contract will need court approval. Or, the lawyer representing the person filing the bankruptcy can handle the approval. Sometimes, however, approval isn't granted.

If the reaffirmation agreement would leave the filer on the hook for a lot of money, it may be denied. This is because Chapter 7 bankruptcy is meant to get a consumer out of debt. So it's easy to see how immediately assuming a large amount of debt would not be in their best interest.

Getting an Auto Loan after Chapter 7 Bankruptcy

If you have just been discharged from bankruptcy and need to buy a car, getting financing approval can be difficult. But if you have bad credit due to bankruptcy or any other reason, Auto Credit Express can help.

We can quickly and easily match you with a dealership in your area that has the right lender connections. You can get approved and back on the road in no time, and our service won't cost you a dime. That's right. You can get free assistance from experts who've been in the business for nearly two decades.

Also, you'll be under no obligation to buy anything when you apply with us. So go ahead and fill out our simple and secure online application to get started today.