Hello and thank you for allowing me the opportunity to assist you.
Question: “What should we do prior to relinquishing the cars? What are our rights as the consumer? Should we file bankruptcy to avoid a lien being placed on our home? If bankruptcy is advised, which chapter should be filed?”
Answer: Unfortunately, you were correctly told that you will owe the difference between the loan balance and the auction proceeds – this is called a deficiency balance. If you can’t make the car payments, then there is no way to keep the vehicles even if you file for bankruptcy protection (though a bankruptcy would stall the repossession for a few weeks).
The general rule in Virginia is that if you have more than $5000 of equity in your home, then a creditor can put a lien on it and, in a worse case scenario, foreclose. Although a bankruptcy won’t save the vehicles, it will prevent the auto lender from putting a lien on your house since the deficiency balance would be discharged (i.e. you would no longer be liable for it).
With regard to filing for bankruptcy protection, I think you should seek the help of a local bankruptcy attorney. There are income restrictions and other guidelines that must be met in order to file for either Chapters 7 or 13, so a lawyer would need to sit down with you and review all of your circumstances in order to give proper advice. That said, I can give you the basics: In a Chapter 7, your assets (minus assets that are “exempted”) will be sold and the proceeds will go to the unsecured creditors that you included in your bankruptcy. The process takes about 4 to 5 months until discharge. In a Chapter 13, you can keep your assets, but you have to make monthly payments to the bankruptcy trustee for 3 to 5 years, after which your debts will be discharged. The general rule is that if you have no assets, then you go for the 7, and if you have assets, then you go for the 13. But because of income requirements, etc., your preference may not be possible.
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DISCLAIMER: Please understand that the complexities of most legal problems cannot be adequately addressed in this setting, and that I am only licensed to practice law in the state of Maryland. Accordingly, you acknowledge (1) that we have not formed an attorney-client relationship, and (2) that my post is general information only and not specific legal advice.