Can Bankruptcy Stop My Car Repossession?

If you are behind on your car payments and facing repossession, filing for bankruptcy can help.  Filing for bankruptcy will generate an automatic stay, which will stop creditors (at least temporarily) from repossessing the vehicle. Depending on which Chapter of the bankruptcy laws you file under, your options to keep the vehicle will vary. 

Chapter 7 Will Temporarily Stop a Repossession

If you are behind on your car payments when you file for Chapter 7 bankruptcy, your lender may not legally repossess your vehicle. This is because when you file bankruptcy, the automatic stay goes into effect and stops most of your creditors from continuing collection efforts, including repossessions and foreclosures.

You or your attorney should immediately notify your lender of your bankruptcy filing so it stops all collection actions. The court will notify your lender of the bankruptcy, but it will take several days more.

The automatic stay can be taken away. Your vehicle lender can ask the bankruptcy court to lift (i.e. remove) the automatic stay as to the car loan. If you are behind in your payments and don’t have much equity in the car, the court is likely lift the stay. If that happens, the lender can continue with collection actions against you, including repossession of your vehicle.

You Must Pay for the Car If You Want to Keep It

Even though Chapter 7 bankruptcy will eliminate your personal responsibility on your car loan, it doesn’t have a way to repay past due car payments. Filing for Chapter 7 bankruptcy will not help prevent an eventual repossession of the car if you fail to make arrangements to pay.

This is so because when a lender loans you money to buy a car, the lender requires you to put the car up as collateral to secure repayment of the loan. This creates a secured debt.

A secured debt has two parts: (1) a contract that makes you responsible to pay back the loan; and (2) a document that gives the lender a security interest in the car until you pay off the loan balance. The document creates a lien. Because the lender has a lien attached to your car, if you fail to pay the loan, the lender can enforce the lien by repossessing your car. The lien cannot be discharged in bankruptcy.

Can You Protect Your Vehicle Equity?

If you want to keep the car, you must first find out whether you have equity in the car, and if so, whether you can protect (exempt) it in bankruptcy. You should speak to a qualified bankruptcy professional about what property you can exempt in bankruptcy.

Common Car Options in Chapter 7

Although it isn’t easy to keep a car in Chapter 7 bankruptcy when you’re behind on the payments, you have options. Here are a few:

• Give the car back to the lender. If you don’t want to keep your car, or you realize that the payment is too much, you can surrender it to the lender. If you surrender your car during your Chapter 7 bankruptcy, you won’t owe anything if the lender isn’t able to sell it for what it’s worth (called a deficiency balance).
• Buy a cheaper car later. If you’re able to wipe out enough other debts, you may be able to save money to buy a more affordable car after your bankruptcy.
• Negotiate a payment plan. Just because you can’t make up car loan arrears in Chapter 7 bankruptcy, doesn’t mean you can’t try to get your lender to agree to accept some form of payment plan. Your lender might agree to work out a new payment as part of a reaffirmation agreement. You should speak with a qualified bankruptcy professional about the ins and out of a reaffirmation agreement.
• Redeem the Car and Pay Less Than What You Owe. Another option that isn’t used often is redemption. Redemption allows you to pay the lender the replacement value of the vehicle, instead of the full amount owed. This can work if the vehicle is worth less than what the debtor currently owes. There are some limitations, however:

• the debt must be a consumer debt (taken out for personal, not business expenses)
• the property can’t be real estate (a car is personal property)
• the property must be tangible (not intangible property, such as stock or publishing rights)
• the filer must be able to exempt all of the equity in the property, and
• the filer must pay the lender must in one lump sum payment.

How Chapter 13 Can Help With a Keeping Your Vehicle

Chapter 13 bankruptcy offers several options to help you keep or get out from under your vehicle. Your options include:

• You can stop repossession. When you file for Chapter 13 bankruptcy, most creditors must stop any collection efforts against you because of the automatic stay. A car lender may not repossess your car once you’ve filed for Chapter 13 bankruptcy. In most cases, you can even get a car back if the lender repossessed it shortly before you filed for Chapter 13, but you may have to pay storage and court officer fees.
• You can give the car back to the bank. If you have a car payment that you can’t afford, or you’re making payments on a car that’s unreliable or needs costly repairs, it might make sense to give it back to the lender. This is called surrendering the vehicle.
• You can catch up on your car payment. If you’re behind on your car loan or lease payments and you file for Chapter 13 bankruptcy, you can keep your car if you pay the amount you’re behind through your repayment plan and continue to make your regular car payments. Depending on how much you owe on your car, you can also choose to pay the entire balance owed through the Chapter 13 bankruptcy, and own it free and clear afterwards. The lender cannot repossess your car if you stay current on your car loan and repayment plan.
• You may be able to reduce your car loan. If the amount of your car loan is more than the value of your car, and the loan is old enough, you might be able to reduce or “cram down” your loan amount in Chapter 13 bankruptcy. Essentially, you can reduce the amount you owe to equal the car’s value.

Regardless of which option you choose to keep your car in Chapter 13 bankruptcy, the key will be making sure you make all of your Chapter 13 plan payments. If you do not make your Chapter 13 plan payments, you may eventually lose the car.

Seek Proper Bankruptcy Guidance

A qualified bankruptcy professional can review your specific options and advise you on your options to keep your car. To explore your bankruptcy options, contact us today and we’ll be happy to help you.