If your car, truck, SUV, van, motorcycle, or other vehicle is repossessed, there are several ways that you may be able to get it back. One of those methods, filing Chapter 13 bankruptcy, may allow you to get your car back from the lender, revise the terms of the loan to make them more favorable to you and even manage other debts as well. You must act quickly, however. Once the lender sells the car, you can’t use Chapter 13 to get it back.
(To learn about two other options of regaining your car after repossession, reinstatement of the loan and redemption of the vehicle, see Car Repossession: What's the Difference Between Reinstatement and Redemption.)
Bankruptcy's Automatic Stay
When an individual or a married couple files Chapter 13, the automatic stay goes into effect immediately. The automatic stay prohibits a creditor from taking any action to collect its debt except through the bankruptcy court. Many types of collection activities are prohibited, including phone calls, demand letters, and lawsuits. The automatic stay also prohibits a car lender from repossessing a vehicle or selling a vehicle if it has already been repossessed. Once the Chapter 13 case is filed, the lender will usually be required to return the vehicle to you.
Timing Your Bankruptcy to Get the Car Back
You will be able to use Chapter 13 to get the car back if the lender has not yet sold it. A lender must abide by state laws governing repossession of vehicles. Most states require the lender to hold the car for 10 to 15 days before it can be sold. Once the car has been sold, you cannot get it back from the lender.
If you file a Chapter 13 case before the car is sold, the automatic stay will prevent the lender from selling the vehicle, and other sections of Chapter 13 will allow you to reinstate the loan and get car back from the lender.
How to Get Your Car Back
After you file your Chapter 13 case, your attorney will notify your lender. Most lenders understand that they must return the vehicle to the borrower and will provide instructions on how and where to pick it up. Occasionally, a lender will be reluctant to cooperate. In that case, your attorney can file a Motion for Turnover with the bankruptcy court asking the judge to order the lender to return possession of the car to you. If the motion is necessary, it may take the judge several days to schedule a hearing.
If you file your Chapter 13 case without an attorney, your lender will usually ask you for a copy of your bankruptcy paperwork which shows your case number, the filing date, and the court.
Using a Chapter 13 Plan to Pay a Car Loan
Once you file your Chapter 13 case, you can manage or get rid of debt by proposing a plan to pay creditors over three to five years. In addition to getting your car back, Chapter 13 may allow you to extend your car payments beyond the original term of the loan. If you purchased the car more than 910 days (two and a half years) before filing the case, you can reduce the interest rate and/or pay the creditor only the value of the vehicle if you owe more than the car is worth.
Example. After making payments on her car loan for three years, Betty’s car had lost value, but she still owed more on it than it was worth. When she ran into some financial difficulty and missed several payments, her bank had the vehicle repossessed. After she filed Chapter 13, her attorney notified the bank and made arrangements for the return of the car. Betty proposed a Chapter 13 payment plan that changed the terms of her contract with the bank in three ways:
- it reduced her interest rate from 18% to 6% ‘
- it stretched out the remaining payments on the loan for three additional years (two years longer than her original contract), and
- it proposed paying the bank the value of the vehicle, which was less than the outstanding balance.
To learn more about how this works, see Your Car in Chapter 13 Bankruptcy.
The “910-Day” Rule
Prior to 2005, debtors in Chapter 13 could routinely propose a plan that would reduce the interest rate or pay only the value of the vehicle. Altering the terms of the loan through Chapter 13 is called a “cramdown.” (Learn how cramdowns work with car loans.) In 2005, Congress changed the bankruptcy law to limit how car loans are treated in Chapter 13 cases. To provide more protection for lenders, the new law limited the debtor’s ability to cramdown the interest rate or the outstanding balance for cars purchased in the 910 days before the Chapter 13 case is filed.
Even if Betty purchased the car within the 910-day “look back” period, filing a Chapter 13 case will still allow her to get the car back and stretch out payments on the outstanding balance (along with any repossession charges) over the course of her Chapter 13 plan.
The Borrower’s Duties
In order to use Chapter 13 to get a car back after repossession, the bankruptcy court will require that you make the Chapter 13 payments on time and keep adequate insurance on the car. If for some reason you can’t do that, the lender can petition the bankruptcy court to lift the automatic stay so that the lender can proceed with repossession.
Using federal bankruptcy law to get a car back after repossession may be especially useful for people in financial difficulty because it can also be used to cure mortgage defaults, eliminate unsecured debt like credit cards and medical bills, and even manage student loans. If your car is repossessed, a consumer bankruptcy attorney can help you determine if it makes sense for you to file a Chapter 13 case to get your car back and to gain control of your finances.