It is the exception rather than the rule that a person financing a vehicle owes less than or equal to the cars value. Unless you put at least 20% down, chances are you are upside down. Bankruptcy not only can eliminate unsecured debts like credit cards, it can also drastically reduce what you owe on your vehicle.
In a chapter 7 bankruptcy, debtors can take advantage of section 722 of the Bankruptcy Code, also known as redemption. Under section 722, a debtor may redeem personal property intended primarily for personal, family, or household use provided they pay in full to their original lender, a value equal to the price a retail merchant would charge for property in like condition. The upside of redemption is that it essentially converts secured debt to unsecured debt to the extent the value exceeds what you owe. The downside is that you have to come up with a lump sum to pay the original lender. The lump sum required will be defined as the price a retail merchant would charge for a car of that kind, considering age and condition of the property, at the time you redeem it. Often this is defined by the cars blue book listing. There are a few lenders out there who will finance people going through bankruptcy for this purpose.
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Chapter 13 involves a monthly payment plan and also offers benefits for those who find themselves upside down on their vehicles. Generally speaking, if your car was purchased for you and your family's use more than 910 days before the bankruptcy is filed, you repay only what the car is worth and not what you owe. This is called "cramdown." The upside here is that your loan is recast up to a 5 year period reducing your monthly payment. The downside is you need to have bought your vehicle more than 910 days, or 2.5 years before the filing, unless the vehicle is primarily for business use. If that is the case then that 910 day rule does not apply. Check with a knowledgeable attorney to determine the best strategy for you.
With redemption, because you have purchased the car after your bankruptcy filing date, the car is yours, and has nothing to do with your bankruptcy estate. Redemption can drastically reduce what you owe on your vehicle because the creditor must accept the replacement value of the item as payment in full, even if you owe much more. When you bought the car, your loan was for what the car was worth when it was new, or what it was worth at the time you bought it. Now you only have to pay for what the car is worth at the time of redemption!
Most often courts allow debtors to keep their cars due the fact that it is one of the few essential items in today's modern world. Your car allows you to get to and from work, which in turn allows you to pay off your debts, both past and future.
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