Legal Question in Bankruptcy in California

Re: Whats first?

If you give up the car first, there is a possibility of taxable debt cancellation income when they sell it at the auction. If you give up the car after filing bankruptcy, the debt is cancelled by the bankruptcy discharge and therefore is not taxable as income.

Also, the bankruptcy might give you the opportunity to negotiate a better deal with the bank to keep the car (i.e. lower payment, better interested rate, etc.). You should talk to a local bankruptcy attorney for further advice.