When you file for bankruptcy, what happens to your car differs depending on what chapter bankruptcy you file for (Chapter 7 or Chapter 13).

Chapter 7 Bankruptcy and Your Car

If you file for Chapter 7 bankruptcy, filers are offered a complete discharge of many unsecured debts. Your car loan is considered a secured debt because it’s attached to property. If you file for Chapter 7 bankruptcy, you have these three options for your car loan:

You can redeem your car where you would make one lump sum payment to your creditor for the car’s current fair market value. If you can afford to make this payment, it’s a good option because you’ll have eliminated car payments and it may make life easier in the future.

However, most people who file for bankruptcy are low on cash, so it is not possible to make one lump sum payment. Another option is to reaffirm your car loan, which allows you to continue to make payments as you did before you filed for Chapter 7 bankruptcy. When you reaffirm your debt, you are agreeing to make payments according to a schedule agreed upon by you and your creditor.

If your financial situation does not allow you to continue making payments or redeem your car, or if you owe more on your car than it’s currently worth, then surrendering your vehicle is the next option. You can also choose to surrender your car to your creditor and have the remainder of your debt discharged.

Chapter 13 Bankruptcy and Your Car

If you file for Chapter 13 bankruptcy, what happens to your car depends on when you purchased it.

Your car is considered a newer car if you purchased your car within 910 days of your bankruptcy filing. If your car is newer, then you are required to pay the full value of the car loan, though it’s possible your interest rate may be reduced.

Your car is considered an older car if you purchased it more than 910 days before your bankruptcy filing. If your car is older, then you are only required to repay the car’s current fair market value.