When you file for Bankruptcy, you have to make a lot of hard choices. One of the hardest choices is whether or not to keep your existing car. There are several factors that come into play here.
First, you have to remember that, in most cases, if you want to keep your car, you are going to have to commit to a “reaffirmation agreement”. This agreement essentially bypasses the Bankruptcy discharge, and commits you to the car loan until the car is paid off. If you surrender the car in the future, your Bankruptcy discharge will have no effect on your obligation to continue to pay on that loan. Occasionally, your attorney can negotiate more favorable terms as part of the reaffirmation agreement process, but once you commit to it (there is a small grace period to change your mind), you are committed to that loan. Another option is a “redemption” where you find a third party company to refinance your car, while in Bankruptcy, for the current value of the car, rather than the current loan balance. This can be a good option if you are severely upside down in the value vs. the loan balance on your car. The downside to the redemption is that the interest rate is usually quite high, but the upside is that normally your loan term remains the same as your old loan, but your monthly payments drop significantly.
Second, if you plan to keep your car, you need to carefully consider the financial factors related to keeping that vehicle over time. The first one is the monthly payment. That payment must be something that is sustainable within your future budget. If the payment is quite high, it will prove difficult if you hit a financial snag (such as a period of unemployment). The second factor is the reliability of the vehicle. Is this vehicle type known to have mechanical problems or to be unreliable. Maintenance costs, especially for higher end or foreign made vehicles can be cost prohibitive. The third factor is the over all mileage and age of the vehicle. You need to figure out how long it will take to pay off your vehicle, and based upon that timeline, how old your vehicle will be at that time.
Let's say that you have 60 months left on your car note, and you typically put 15,000 miles on your car each year. If the car is already old, or already has a lot of miles on it, you can expect that car to be five years older, and have 75,000 additional miles on it, when it is paid off. Based upon that, is that car worth 60 monthly payments?
In general, we have to live with the paradox that cars are terrible investments, but completely necessary to most people's daily lives. A Bankruptcy offers you a fresh start in more ways than one. Sometimes a fresh start from a burdensome car payment, or from an unreliable car is just as important as eliminating credit card or medical debt.
On the other hand, the old adage of “if it ain't broke, don't fix it” does apply here. If your car is reliable, the monthly payments are manageable, and the loan to value ratio is not severely upside-down, then sometimes keeping a car that works well for you is a smart option.
Either way, you will want to discuss these options with your Bankruptcy attorney. For that discussion, it might be helpful to know how many miles you typically drive per year, and how much the maintenance costs of the vehicle have been over the past few years. Your Bankruptcy attorney should be able to pull the Blue Book value on the vehicle and the reaffirmation agreement that your lender will send to your attorney will have important information such as the number of payments left on the loan, the interest rate, and the monthly payment. Using this information, you and your attorney should be able to come up with a good fact-based decision as to whether this vehicle is worth keeping or surrendering in your Bankruptcy case.