Steps to Surrender, Selling, or Trading a Car in Bankruptcy

There are many reasons a client decides to surrender, sell, or trade a vehicle in bankruptcy. These include:

The vehicle value is “upside down” meaning the vehicle is worth considerably less than is owed.
The vehicle is in poor condition.
The cost of the vehicle is no longer affordable.
The vehicle is not needed.

Impact of Surrendering, Selling, or Trading a Vehicle

Having a vehicle payment can be part of what assists you in qualifying for a Chapter 7 bankruptcy or contributes to a lower payment in a Chapter 13 bankruptcy. If you are considering surrendering a vehicle before or during your bankruptcy you should first discuss this with your attorney to insure there is no peripheral effect on your filing.

When to Surrender the Vehicle

If you have decided to surrender the vehicle but need to maximize using the car as long as possible even though you have stopped paying most people want to know when they will have to return it.

Before Filing – Prior to filing your bankruptcy there is no law that requires you to voluntarily surrender a vehicle you own even if you are not paying for it absent a court order. If you are behind on payments for your vehicle you should assume that the lender is currently looking to repossess the vehicle. To delay this happening it is best not to leave the vehicle unattended or in an accessible location. Most vehicles are repossessed in the night or early morning. To avoid this from occurring you should consider securing the vehicle in a garage. If you have moved and the lender is not aware of your current location the likelihood of the vehicle being repossessed at your home is less. Repo companies will also go to your place of work, if known, to pick up a car. They have also followed car owners while out shopping and picked vehicles up from the store parking lot leaving owners to come back outside to find their car gone. Always be prepared with a backup plan like Uber or a friend.

Possessions – Once you are behind on your vehicle you should assume an unannounced repossession will occur. To reduce the inconvenience of such an unannounced repossession you should clean out all personal items from the vehicle and consciously not leave items in the vehicle when unattended. If you are inclined to keep personal items in your glove compartment or trunk, you should make a special point of cleaning out those locations.

After Filing – If you are planning to surrender your vehicle as part of your bankruptcy you should retain control of the vehicle until after you meeting with the trustee, which generally occurs around 30-45 days after filing. The trustee has the right and responsibility to determine whether there is any equity available to benefit creditors. While it may seem obvious to you there is none, the trustee is still required to do his “due diligence” and document that he has explored that possibility at the meeting.

Once the trustee has abandon his interest in the vehicle you are then able to contact the lender for instructions on how to turn over the vehicle.

Process of Surrendering a Vehicle Back to the Lender

Voluntary Repossession –

If you are already behind on the vehicle and have decided to allowing the vehicle to be voluntarily repossessed you should take the following steps to assist in the recovery.

Remove all your personal belongings.
Leave the vehicle accessible.
Take off the plates. Note: If you leave the unplated vehicle on a public road you could be ticketed or fined. If this should happen, providing evidence to the court that the vehicle was registered and plated should be sufficient to address the court’s concern.
Take pictures of the interior and exterior of the vehicle to document the condition and also of the odometer to note the mileage.
Keep insurance active until you are notified of the sale. The vehicle generally is kept in your name until a public auction. If the vehicle gets in an accident while in your name even though out of your possession you can still be named in a lawsuit.
Notify the Division of Motor Vehicles of the transfer.

What if the Lender Does Not Want the Vehicle?

If the vehicle is older or the loan on the vehicle is either through a title loan company or a non-traditional vehicle lender, the lender may not want the vehicle back. This also may be the case if there is excessive damage to the vehicle and the lender is aware of that the damage makes it unlikely they could liquidate it for any significant value. If this happens you are stuck with a vehicle that you do not have a title to.

Your first responsibility to document throughly your efforts to notify the lender of the location of the vehicle so they may pick it up. If after a reasonable amount of time, which would be a minimum of 30 to 60 days, the lender has not taken steps to recover the vehicle you have several options to address the situation.

WARNING: Before taking these steps make sure you have documented reasonable effort to assist the lender in recovering the vehicle.

You could sell the vehicle for scrap. Some scrap yards will not take vehicle without title information.
You can negotiate with the lender to pay some amount in return for a clear title. In most cases, these lenders are unwilling to negotiate.
You can apply to the DMV with an “abandon title”. The DMV regulations set out the process to getting an abandoned title. After receiving the title to the vehicle you are free to do what you please with it.

Selling or Trading A Car

Number one “n0-no”, do not sell or trade a car with a relative prior to filing and do not sell a vehicle for nominal value to a friend or relative. It is an “urban myth” that if property is not in your name it cannot be touched.

If you are selling a vehicle prior to filing, consult your attorney first. Also document the sale and try to get market value.

If you are selling a vehicle during the bankruptcy talk to your attorney first. You may need court permission.

If you are trading a vehicle in prior to filing, this may not be a good decision because it will just roll any negative equity into the new vehicle loan. Consult your attorney first.

If you are trading in during the bankruptcy, once again, consult your attorney. Court permission may be required.