Surrender of Vehicle

Posted by Kevin on October 24, 2010 under Bankruptcy Blog | Be the First to Comment

Say you bought a car and financed it.  The lender will have a lien on the car.  You lose your job and file a Chapter 7 bankruptcy.  What happens to the car?

Under the new Code, a debtor can elect to do one of three things:  surrender the car to the lender; redeem the car for fair market value usually in one payment; or reaffirm the entire debt and continue making payments.

Here is an interesting case involving a surrender of a car.  It took place in Maine.  That is in a different circuit from New Jersey but the ruling is instructive- that means that the bankruptcy courts in NJ will take heed.

The debtors owed money to GMAC on their Chevy Cavalier when they filed bankruptcy.  They opted to surrender the vehicle.  GMAC filed a motion for relief from the automatic stay (check previous blogs for explanation).  The car, though, was not working and basically a piece of junk (can’t use the other word).  The debtors took the car to a junk yard but they could not take the car because GMAC had to sign off on its lien.  GMAC refused and tried to hold the debtors up for the value of the car.

The trial court (which is the bankruptcy court) found for GMAC.  However, the 1st Circuit found otherwise.  That court said that surrender does not include delivery to the lender, and, more importantly, surrender does not require the lender to repossess the car if the lender believes that it  is not cost effective.  But the real question is whether the lender has to release its lien if it chooses not to repossess.  Only if the action of the lender is deemed to be “coercive”.

In this case, the 1st Circuit found that the debtors had done everything right.  That court also found that GMAC had a right under Maine law not to release its lien unless it was paid.  The 1st Circuit said that a bankruptcy court should follow state law unless some federal interest demands a different result.    Then,  the Court basically said that GMAC was playing it “fast and loose”.  By not repossession, they were, in effect, forcing the debtors to reaffirm.  But the Code says you can’t do that.  GMAC’s action was found to be “coercive”.  Not only did GMAC have to release the lien but it had to pay damages to the debtors for a violation of what is called the discharge injunction.  The case is called In Re: Pratt.

What is the lesson?  If you file a bankruptcy and you want to surrender your car to a lender, the bankruptcy ain’t over until the lender takes the car.  If the lender refuses to repossess, make sure that you let your lawyer know what is happening so that he or she can take steps to protect you.