It’s not uncommon to hear someone say, “I'd probably file bankruptcy, but I don't want to lose my car.”

A common misperception or fear that some people have when considering bankruptcy is losing a vehicle they are paying for or have already paid for. The bankruptcy system understands a person's need for reliable transportation before and after filing for bankruptcy, and almost everyone who needs to file either owns or is purchasing a car.  So, the bankruptcy court has special provisions that usually allow you to keep your vehicle through and after the bankruptcy process. Here are some examples of clients’ concerns or desires when filing for bankruptcy.

MY CAR IS PAID FOR, AND I WANT TO KEEP IT!

If your car is paid for, you will be able to keep the car, but you would want to discuss the car's value with your bankruptcy attorney. Bankruptcy laws allow people to keep "equity" in their car, but that amount is set by the state where you file bankruptcy. 

I WANT TO KEEP MY CAR, BUT IT iS NOT PAID FOR.

Vehicle loans are normally “secured debts” that are treated differently than a common unsecured debt, such as a medical bill or credit card. The bankruptcy court strives to protect the car purchaser and seller by a process called “reaffirmation.”

The payments MUST still be made to the lender if you want to keep your car. This means that the car lender is allowed to keep receiving payments or the vehicle if payments are not made. Most car lenders will ask you to sign a reaffirmation agreement.

You should discuss the details with your lawyer, but this simply means that your car payment (and obligation to pay) are not impacted by your bankruptcy filing.

I HAVE A CAR, BUT I REALLY CAN’T AFFORD THE PAYMENT.

Although the bankruptcy court treats a secured loan such as a car differently, you still have the option to discharge the debt on the car and allow the car to be turned back into the lender. If you choose, you may also "surrender" the vehicle to the car lender without further financial consequence. The lender would get the vehicle back but could not pursue you for the money still owed on the car like they could if it were repossessed. The money owed on the car would be discharged along with the other debts in your bankruptcy.

As a car and a car loan are extremely important to both you and the bankruptcy process, you should thoroughly discuss this option with your attorney if considering it. You should discuss the value of the car, the amount of debt, and feasibility with your attorney and make the choice that provides you with the best financial “fresh start” the process allows.

If you are thinking of filing for bankruptcy or have questions about the bankruptcy process, call an attorney of your choice (https://mx.arkbar.com/Attorneys/Arkansas-Find-A-Lawyer) or to speak with one of our attorneys, call our helpline at 501-376-3423, Monday-Friday.

AUTHOR: ERIC SOLLER, STAFF ATTORNEY FOR THE CENTER FOR ARKANSAS LEGAL SERVICES