There are 5 alternative ways to deal with a car loan when you are declaring bankruptcy:
Alternative 1: You can let your vehicle be repossessed
Alternative 2: You can surrender the vehicle
Alternative 3: You can keep the vehicle and reaffirm the loan
Alternative 4: You may be able to keep the vehicle and "Pay and Retain"
Alternative 5: You may be able to keep the vehicle and Redeem
Alternative one (letting your vehicle be repossessed) is certainly one approach. You simply stop paying the lender for the vehicle. Eventually the lender finds your vehicle and repossesses it. Typically, the value of the vehicle is less than the amount you owe. The difference is called the Deficiency. You then receive a bill from the lender for the amount of the deficiency plus the costs of the repossession. If you file for bankruptcy you will not owe this amount.
But you probably need a vehicle. You may be able to purchase a replacement vehicle while you are in bankruptcy. There are companies out there that may provide financing. You might want to check them out. One is Fresh Start Loan Corporation. Another one is called Friendly Finance Corporation.
Alternative 2 is just like Alternative 1 except instead of waiting for the lender to repossess the vehicle you either drive it over to the lender’s office or you tell them to come and get it. The discussion about the deficiency is equally applicable here.
Alternative 3 or Reaffirmation means that you make a new promise to pay the vehicle loan. In other words, the bankruptcy discharges the original loan but you make a new promise to pay the loan. If you do this you remain personally liable for the vehicle loan even after bankruptcy. If, say 6 months after the bankruptcy you default then the lender will probably sue you. You won’t be able to discharge that debt for 8 years after the original bankruptcy filing. This is the alternative that your lender will prefer. After you file for bankruptcy your lender will probably offer you this "opportunity". Reaffirmation papers must be filed with the court.
Alternative 4 "pay and retain" means that you continue to make your monthly payments on the car loan but you do not sign a reaffirmation agreement. This is better for you because if you default all the lender can do is repossess the vehicle. The lender can not sue you. (All this is assuming you are declaring bankruptcy). This used to be the way I advised my clients to deal with this car loans (unless a redemption made better sense). But there is a problem with this approach. Buried in your vehicle loan papers is a provision that says something like this: "If the borrower files for bankruptcy he is considered to be in default." This is sometimes called an Ipso Facto Clause. Many vehicle lenders, especially credit unions, are now enforcing this Ipso Facto Clause. They threaten that if you do not sign the reaffirmation agreement they will repossess the vehicle - even if you are current on the payments. If the lender makes this kind of threat then you will probably have to sign the reaffirmation agreement if you want to keep the vehicle.
Alternative 5, Redemption, is often used when you owe more on the vehicle that it’s worth but you want to keep it. A redemption allows you to pay off the loan for the fair market value of the vehicle. I may even be able to get you a new loan to pay the lender the fair market value of the vehicle. One company that helps arrange the financing for these redemptions is 722 Redemption Funding. You might want to take a look at their web site.
As your San Diego Bankruptcy attorney I welcome the opportunity to discuss these alternatives with you and advise you of what makes the best sense for your particular situation.