Voluntarily Giving Up Your Car in a Bankruptcy

Voluntarily Giving Up Your Car in a Bankruptcy

Understanding the Concept of Voluntarily Giving Up Your Car in a Bankruptcy

It is not uncommon for individuals to find themselves under a mountain of debt due to purchasing beyond their means. A common instance of this is when people buy a car or a house that they eventually realize they cannot afford. This could be due to a change in their financial situation or an initial overestimation of their capacity to repay. In such situations, declaring bankruptcy is a viable option to address the debt problem comprehensively, including the unmanageable car loan or lease.

Voluntarily giving up your car in a bankruptcy, also known as voluntary surrender, could be a viable solution for individuals who can no longer afford their car loan payments. Let’s delve into this concept and understand its implications, process, and potential benefits.

The Basics of Voluntary Surrender

Voluntary surrender is a process where you willingly return the car to the loan provider during the insolvency proceedings. This process is typically invoked when the car loan payments become unmanageable. Since car loans are secured debts, the lender has the right to repossess your car if you default on the payments. However, these secured debts cannot be included in a consumer proposal or bankruptcy.

When you return the car to the lender or the dealership, they sell the vehicle and provide you with a “statement of realization.” The sale proceeds are deducted from your car loan, after factoring in penalties, fees, and repossession costs. The remaining amount becomes unsecured debt.

Reasons to Consider Voluntary Surrender of a Vehicle

There could be multiple reasons why you may consider voluntarily giving up your car in a bankruptcy.

Unaffordable Car Payments

The foremost reason is that you cannot afford the car payments anymore. You may be neglecting other essential bills or debt repayments to keep up with your car loan. However, this approach is unsustainable and can lead to severe financial distress.

Overpriced Cars

In some cases, individuals buy cars they cannot afford. This situation could arise due to a change in income or an impulsive purchase. Voluntary surrender can provide an escape from a bad deal, although certain financial consequences still need to be managed.

Breakdowns and Wear & Tear

If your car is nearing the end of its life and is not worth keeping, voluntary surrender can be a good option. You may still be liable for thousands of dollars on your car loan, but the car’s worth may have significantly diminished due to accidents or breakdowns. In such cases, you’re essentially paying for a worthless asset.

Emotional Aspects

Voluntary surrender can be less distressing than having your car repossessed. When a lender repossesses a vehicle, they send someone to collect it on their terms, which can be a distressing experience. In contrast, voluntary surrender feels like you’re taking responsibility for your debt, and this decision is on your terms.

Underwater on Your Vehicle

Being “underwater” on your vehicle means that you owe more on your loan than your car is worth. This situation can occur due to the rapid depreciation of vehicles. If you cannot afford your car payments, there’s no way out. Even if you sell your vehicle, the money you raise won’t be adequate to pay off the loan.

The Process of Voluntarily Surrendering Your Car

To initiate voluntary surrender, you need to inform your lender that you can no longer manage the car payments and wish to return the vehicle. The lender would then ask you to drop the vehicle off on an agreed-upon date or might send someone to pick it up.

Once the lender sells the vehicle, you receive your statement of realization, which shows how much debt has been covered and the amount you still owe. This remaining loan shortfall becomes an unsecured loan that you are now responsible for.

Implications of Surrendering Your Vehicle

The most critical aspect of voluntary surrender is that it transforms secured debt into unsecured debt. This debt can then be included in a bankruptcy or a consumer proposal. However, one of the significant impacts of voluntary surrender is on your credit report. It is considered a loan default and can impact your ability to qualify for credit in the future.

Surrendering a Leased Car

Voluntary surrender can also apply to leased cars. The lender can still pursue you for any remaining payment that you’re owed, but if you are taking other insolvency actions, this debt can be discharged.

Keeping Your Car in a Bankruptcy

Many individuals who file bankruptcy do not end up giving up their cars. They need it for transportation, and unless they’ve spent beyond their means on a car they couldn’t afford, the cost difference between one vehicle and another may not be significant enough to justify voluntary surrender.

You can typically keep a financed or leased car during bankruptcy because the equity in a vehicle (up to a certain limit) is exempt from bankruptcy proceedings. If your equity is over the exemption limit, or you own more than one vehicle that you’re not willing to part with, you can pay the difference into your bankruptcy estate, or you can protect your assets by filing a consumer proposal instead of bankruptcy.


Voluntarily giving up your car in a bankruptcy could be a good option for your financial situation, but you don’t necessarily have to give up your car. You should consult with a Licensed Insolvency Trustee about your finances to find a solution that fits. They can help you understand the short-term and long-term implications of your decisions and guide you through the process.

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