Did you know that you can easily surrender your car in a Chapter 7 bankruptcy? You can escape high loan payments, punishing interest, and avoid deficiency lawsuits.

If you lease or finance a car and attempt to surrender the car outside of bankruptcy, your lender will likely charge you all sorts of fees. Many times, a lender will sue a borrower for the deficiency balance” of the loan.

A “deficiency balance” is the amount of money you still owe the lender (i.e., lien holder) even after surrendering the car or automobile.  Deficiency balances can easily be many thousands of dollars regardless of whether you think the car was sold in a commercially reasonable matter for a fair value.  Furthermore, it doesn’t matter if you voluntarily surrender your car or whether it is repossessed — often time there is a debt owed.

Surrendering a car during the bankruptcy process is completely different. At the outset of your case, we notify the Bankruptcy Court and your lender that you intend to surrender your vehicle.

After your bankruptcy case is started, your lender may attempt to talk you out of surrendering your car.  Why?  The lender or lienholder would prefer that you keep the car and continue making payments. However, the decision is 100% yours to make.

Some lenders may wait until after your bankruptcy case is over to retake possession of your car.  In such case, what do you do?  

  • Insure the automobile and continue to drive it?  
  • Drive the automobile without insurance?  
  • Are there criminal implications for keeping the car despite not making payments?  
  • What if the car is damaged?  Or worse yet, stolen?

Others lien holders are more aggressive and will seek the return of the car before your bankruptcy is over.  They would do this through seeking relief of the automatic stay, getting permission from the bankruptcy court to take an asset (i.e., your car) from the bankruptcy estate.

Once you make the decision to surrender your car in the bankruptcy, it is best that you start making alternative transportation arrangements. Most lenders will communicate with your or your bankruptcy attorneys directly to set up a day and time to voluntarily surrender the car. Others lenders, like Wells Fargo, are very inconsistent and, according to debtors’ attorneys across the country, have mislead debtors in the past.  Therefore, rather than guess or try to answer questions that are sometime beyond capable of being clearly answered, it is wise to remove all of your possessions from the car (just in case it is taken without your knowledge) and make arrangements to surrender your vehicle.

Rick Morin is a bankruptcy attorney in Sacramento, CA who assists consumers in filing bankruptcy and surrendering their cars in a Chapter 7 Bankruptcy.  The above is a summary of excerpts from his blog post documenting problems that debtors encounter surrendering their automobiles incident to a bankruptcy filing and may be reviewed here.