If you are not making timely car loan payments, Chapter 7 bankruptcy cannot permanently prevent a car repossession. However, Chapter 7 can temporarily delay the lender from repossessing your car and allow you more time to negotiate or cure your default. Read on to learn more about how Chapter 7 can help you if your car is about to be repossessed.
The Automatic Stay Will Temporarily Prohibit Repossession
When you file for Chapter 7 bankruptcy, most creditors are prohibited from continuing their collection activities. This is known as the automatic stay. This means that your lender cannot repossess your car without getting court approval first. However, a Chapter 7 bankruptcy usually lasts only a few months. After your case is closed, there is no stay and the lender is free to repossess the car. (For details on how the automatic stay works, see Bankruptcy's Automatic Stay.)
The Lender Can Ask Court Permission to Repossess During Chapter 7
Just because there is an automatic stay doesn’t mean you can always keep the car until your case is closed. If your lender wants the car sooner, it is allowed to seek court permission to repossess by filing a motion to lift the automatic stay. Unless you can show that you are making payments and attempting to catch up on your arrears, most Chapter 7 judges will grant the lender permission to repossess. (To learn more, see When Can a Creditor Get Relief From the Automatic Stay?.)
As a result, Chapter 7 bankruptcy only allows you temporary relief from repossession. If you are not working with your lender to come up with a way to save your car, it will usually be repossessed eventually. However, Chapter 7 can still help by providing you more time and options to save your car.
What Are Your Options If You Want to Stop Repossession?
Below, we discuss the options Chapter 7 bankruptcy provides to avoid having your car repossessed.
Negotiate New Loan Terms
The temporary stay under Chapter 7 allows you more time to negotiate with your lender. If you are willing to work with the lender, you may come up with a way to keep your car and avoid repossession.
Your bankruptcy discharge wipes out your personal liability on the loan (but not the lien the lender has). So repossession is usually the only remedy left for the lender after bankruptcy. As a result, the lender has more incentive to negotiate new loan terms (especially if the car is worth less than your loan balance) because it wants the entire balance of the loan as well as interest payments.
You might even be able to negotiate new terms such as a reduced balance or interest rate. But keep in mind that you will have to reaffirm the debt to do this (make yourself personally liable on the loan again). (To learn about the pros and cons of reaffirming secured debt, see Reaffirming a Car Loan in Chapter 7 Bankruptcy.)
Cure the Default
The temporary stay can also allow you to bring your loan current or otherwise cure your default. If you can afford to cure your default, the lender will typically not have a reason to repossess your car because it makes more money if you continue to pay on the loan.
Wipe Out the Lien By Redeeming Your Car
Chapter 7 bankruptcy also allows you to wipe out the lender’s lien by buying the car back at its fair market value. This is known as redeeming the car. You can save a lot of money by redeeming if your car is worth significantly less than the balance of your loan. However, you can only take advantage of redemption if you can afford to make the lender a lump sum payment. If you wish to redeem, you must file a motion and obtain court permission. (To learn more, see Redeeming a Car Loan in Chapter 7 Bankruptcy.)
Example. Your outstanding loan balance is $10,000 but your car is only worth $6,000. You can redeem the car and own it free and clear if you can pay the lender $6,000 in one lump sum payment.
To learn more about how Chapter 7 treats your car and car loan, see Your Car in Chapter 7 Bankruptcy.