Legal Question in Bankruptcy in California

The car needs to be exempted or protected from liquidation (if you're filing chapter 7 bankruptcy). Usually the exemption allowances suffice, so that's not a common worry. Your personal liability on the loan is extinguished through a bankruptcy discharge, but you'll have to pay off the loan in order to keep the car and acquire title. There are complications with regard to reaffirmation (re-signing the loan after bankruptcy, which reinstates the personal liability), which need to be discussed with your attorney. This answer does not address chapter 13 issues or the complications from financing a new car within 120 days prior to filing the case.

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In a Chapter 7, if the car is worth more than the remainder of the loan, you will have to exempt the equity in your bankruptcy. Of course, you will have to list the car as an asset. If you want to keep the car, you might have to reaffirm the loan, which is a new agreement and takes the loan out of bankruptcy. This means that if you fall behind on the vehicle payments, it can be repossessed, and you can be held liable for the difference between the loan balance and the auction proceeds, plus fees and, maybe, interest. You can also redeem the car, which is paying the fair market value in one lump sum. Obviously, if you're in bankruptcy, you probably don't have that kind of cash lying around.

If you want to surrender the car to the lender because the loan payments are just too high, you can do that through the bankruptcy without financial penalty.

If you don't sign the reaffirmation agreement or redeem the vehicle, the lender either might seek relief from the bankruptcy court to proceed with repossession or, after the bankruptcy discharge is granted, repossess the car without your having any further financial obligation.

I hope this answers your question.