Generally, you wipe out the debt.
If you look at the searches, you can see that somebody was on my blog today who apparently had a financed vehicle, damaged in an accident, that was going to be or already was repossessed. I’m assuming that they’re worried about being sued by the bank. If they don’t file bankruptcy, that’s a real possibility. If they do file bankruptcy, then they should be fine.
Basically, you can discharge that debt and turn over the vehicle, no matter what the condition. Now you should have had it fully insured, and if you receive an insurance settlement, you may have to turn over those monies to the bank who financed your car.
However, if you let your insurance lapse, then there’s no insurance settlement coming. In theory, the bank could sue you for the damage to the car, but that gets wiped out by the bankruptcy as well.
I wrote about this 3.5 years back. It’s still relevant: