Surrendering a car in bankruptcy

Bankruptcy provides the opportunity to walk away from a car with no continuing obligation to make payments.

OK, so you can no longer afford your car. What to do? The first idea comes to you after a few intense discussions with your spouse or perhaps after a few beers. “I know, we’ll just give it back.” The next day you call the dealership and tell them why you can’t afford to make payments. Fully expecting to hear from that same understanding salesman that threw in the leather and sunroof at “factory” prices, instead you get the third degree about late fees and penalties. “NO, you can’t just turn the car in early, sorry.” Whether you’ve financed the purchase or leased, the dealership or lender wants their money and they won’t be shy about asking (suing) for it.

The sad reality is that consumers who finance close to 100% of the purchase price of a car over a 36 or even 48 month term often don’t realize the ramifications of personally guaranteeing debt backed by a rapidly depreciating asset. Especially if payments include a high rate of interest, the car will go down in value much faster than the principal balance of the loan. It is not uncommon to be severly underwater when you drive the car off the lot. If you were to simply give the car back, your lender would fire sale it at auction and come after you for the difference between the sale price and the outstanding amount of the loan. The end result could be owing payments on a car that you no longer drive.

Although bankruptcy is not a step to be taken lightly, it does provide a solution to the problem of unaffordable car payments. When I meet with clients, many are relieved to learn that filing for bankruptcy affords them the opportunity to give an underwater car back to their lender with no continuing obligations. The lender will still sell the car at auction, however, the bankruptcy filing effectively removes the debtor’s personal guarantee from the note. The lender’s only recourse is to then take back the car, they can no longer come after you for late fees or a deficiency judgment. In a slightly different scenario, if you have fallen behind on car payments and need time to catch up, chapter 13 bankruptcy may be the solution. If you have questions about cars and bankruptcy, consult an attorney.