Many people seek bankruptcy when their assets become at risk of repossession. While filing for bankruptcy can offer protection of assets such as your home or car, there are some differences to the way a Chapter 7 case manages these debts.
In general, there are three options for managing auto loan debts in bankruptcy. First, you can surrender the car back to the lender. This may be the better option if the car is worth less than you owe on the loan or has loan terms that you are unable to manage in the future. If you give the car back to the lender and receive a debt discharge in Chapter 7, you will not owe any money and will be absolved of any future debt liability.
Second, you can redeem the car by paying the amount the car is worth rather than what is owed. This can be one option for anyone who is upside down on their loan and wants to keep the car. The problem with redeeming the car is that the payment is due in one lump sum, something most people cannot afford to pay. However, some people have taken to borrowing the money elsewhere and repaying it separate from the auto loan.
The last option is to keep the car. While this is generally the option people desire there are only two ways to make this happen. You must either continue to make payments on the car, which can be done through a Chapter 13 bankruptcy instead of Chapter 7, or you must hope the bankruptcy exemption laws in your state cover at least one automobile. Each state carries different bankruptcy exemption laws, some of which may even allow for the full protection of one or more vehicles in bankruptcy.