Worst case scenario is that the court finds that you did not preserve the collateral for potential repossession and you could be responsible for the debt. More likely that the bank will not pursue the lien and you would otherwise get a discharge of your personal liability to pay back the installment note.
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The debt for the car will be discharged in a bankruptcy.
It is unlikely that the creditor will go to the time and cost of trying to recover a vehicle with a blown engine, but if they did, they might get some relief from the bankruptcy court because you sold the collateral that secured the loan.
It would seem, however, that it would cost them more than they could get from you for the salvage value of the vehicle, but be prepared to produce the documentation from the sale to the junk yard to establish that the vehicle was sold as scrap.
"Do It Yourself" bankruptcy filing is a really bad idea, so you should seek the advise of an experienced bankruptcy attorney to answer your questions. While the Bankruptcy Code is federal law, there are local procedures and forms. "Do It Yourself" bankruptcy filing is a really bad idea The information provided is not intended as legal advice. No Attorney/Client relationship is intended, implied or created.
The fact that you haven't paid for 3 years and the bank never attempted to recover the collateral is a very strong indication of their interest in the vehicle. Don't worry.
If you scrape a car with a lien you will leave a scratch, just the same as if you scrape it with a key :-)
In my state, destroying or selling personal property that is subject to a security interest without permission from the lender is a misdemeanor. I just sent a potential client off to consult with a criminal lawyer so that he doesn't have to take the Fifth Amendment when asked about something similar.