Will Chapter 7 Bankruptcy Prevent a Car Repossession?

Chapter 7 bankruptcy can temporarily delay car repossession, but filing alone can’t stop it permanently. You’d likely be more successful filing for Chapter 13 if you’re behind on your car payments and want to keep your car. Keep reading to learn what filers should do to ensure they don’t lose a car in Chapter 7 bankruptcy and options to explore when a vehicle is about to be repossessed. If you’re worried that your lender is considering repossessing your car, you’ll want to act fast and file for bankruptcy as soon as possible using a skeleton or emergency bankruptcy filing, if necessary. 

How Chapters 7 and 13 Help Filers Stop Car Repossession

The bankruptcy court immediately puts an “automatic stay” in place when you file, telling your creditors to stop collecting or taking your property. The automatic stay gives you time to work out your payment issues with the lender if the lender is willing to negotiate. You might even be able to recover the car if the lender hasn’t already sold it.

This assumes that you haven't recently filed for bankruptcy. If you have, the automatic stay might not protect you. (11 U.S.C. § 362.) 

Here’s how the two chapters handle issues with cars:

How to Make Sure You Don’t Lose a Car in Chapter 7 Bankruptcy

You can keep your car in Chapter 7 bankruptcy if you protect your equity with a bankruptcy exemption, stay current on your loan payments, and file your Statement of Intention on time. To keep your car in bankruptcy, you must get past both the car lender and the Chapter 7 bankruptcy trustee. To prevent the Chapter 7 trustee from taking and selling your car, you must:

• protect your vehicle equity with a bankruptcy exemption,
• be current on your payment (this prevents the car lender from recovering it), and
• file (and follow through) on your Statement of Intention form.

If you meet these requirements, you’ll keep your car. If you can’t meet one or more, it’s possible to fix the problem using one of the techniques below, but your attorney won't be able to guarantee that you'll keep your car.

What Are My Chapter 7 Repossession Prevention Options?

You can catch up on payments or renegotiate and reaffirm the loan contract, both of which require the lender's agreement. The other option is to file a motion asking the court to allow you to pay the car's value through redemption.

Catch Up on Your Payments

Catching up on missed payments, fees, and costs is usually the simplest way to keep your car. If you can pay what’s overdue, most lenders will let you continue with your regular monthly payment instead of repossessing the vehicle. If you can afford this, bringing your car loan current before filing for Chapter 7 will provide you with more protection and less hassle.

However, you should ensure you meet other requirements, such as protecting your car equity with a bankruptcy exemption. Otherwise, you’d risk losing the car to the Chapter 7 bankruptcy trustee instead of the car lender. (11 U.S.C. § 522.)

Negotiate New Loan Terms

You might be able to negotiate new terms, such as a reduced balance or interest rate. Or the lender might roll the late payments into the balance, increase the monthly payment, or extend the loan term.

However, you’ll need to “reaffirm” your car loan by entering into a new loan contract, making yourself personally liable for the loan again. Learn about reaffirmation agreements in Chapter 7 bankruptcy. (11 U.S.C. § 524(c).)

Wipe Out the Lien By Redeeming the Car Loan

Chapter 7 bankruptcy lets you “redeem” a car by purchasing it at its fair market value in a single lump sum. Redeeming a car can be great if your vehicle is worth significantly less than you owe. (11 U.S.C. § 722.)

However, redemption is also relatively expensive because it requires a motion, and your lawyer will charge extra to file it. If you obtain court permission, you must pay the lender the reduced balance in a single lump sum payment. Many borrow money from a friend, family member, or a lender specializing in bankruptcy redemption loans.

Example. Suppose your outstanding loan balance is $10,000, but your car is only worth $6,000. You can redeem the vehicle and own it outright if the bankruptcy court permits you to pay the lender $6,000 in a lump-sum payment.

Do I Have to Pay My Balance to Stop Repossession?

Yes. When you financed your car, you gave the lender a lien allowing the lender to take back the vehicle if you don’t make your monthly payments. The lien doesn’t go away in bankruptcy, so if you don’t work out the payment delinquency, you’ll risk losing the car once the court removes the automatic stay.

How Long Before I Lose My Car to Repossession?

In Chapter 7, you’ll have four months or less to work out a deal or catch up on what you owe. After your Chapter 7 case is closed, the automatic stay lifts, and the lender can pursue its collection rights.

Keep in mind that the lender doesn’t have to work with you. Not only can the lender refuse to negotiate with you, but the lender can ask the bankruptcy court to lift the automatic stay. If granted, the lender can move forward with the repossession.

How Do I Tell the Court What I’m Doing With My Car?

If you file for Chapter 7 and still owe money on your car, you must file a “Statement of Intention” telling the court and your lender whether you plan to keep the car (by reaffirming the loan or redeeming it) or surrender it. You must file it within 30 days of your bankruptcy filing, or by the date of your meeting of creditors, whichever comes first. (11 U.S.C. § 521(a)(2).)

Will Filing for Chapter 13 Help Prevent Repossession?

Yes. The bankruptcy chapter best suited to prevent a car repossession is Chapter 13, not Chapter 7. The Chapter 13 payment plan helps people keep cars, homes, and other “secured” property put up as collateral for a loan. (11 U.S.C. § 1322(b)(5).)

How Much Time Will I Have in Chapter 13?

In Chapter 13, you’ll have three or five years to catch up on late payments. You’ll also pay your regular monthly payment. If you’re like most, you’ll pay off the entire vehicle balance during Chapter 13 and own it outright once the plan is complete.

Can I Lower My Car Payment With a Chapter 13 Cramdown?

Sometimes. If you owe more on your car loan than the vehicle is worth, Chapter 13 might let you “cram down” the loan, reducing your secured debt to the car’s current value and paying the rest as an unsecured debt (which often gets paid at a fraction of its worth, or not at all). But this option only applies if you bought the car more than 910 days before filing; more recent purchases don’t qualify. (11 U.S.C. § 1325(a).)

Example. Suppose you owe $15,000 on a car now worth $9,000, and you bought it more than 910 days ago. A cramdown could let you pay only $9,000 through your Chapter 13 plan, with the remaining $6,000 treated as unsecured debt.

What Are the Downsides to Filing for Chapter 13 Bankruptcy?

Many people can’t afford a Chapter 13 payment. You must make enough income to pay your monthly living expenses, current and back car payments, and other debt amounts required by Chapter 13. One of the first steps when determining whether Chapter 13 is the right choice for you is calculating a Chapter 13 plan payment.

Have You Already Lost a Car to Repossession? A Few Things to Know

You might still get your car back, or at least stop owing on it, even after repossession. If the lender repossessed your car but hasn’t sold your car yet, your state laws might let you “reinstate” or rehabilitate your loan and recover your vehicle. A local lawyer can explain the amount you must pay and other state requirements for getting a car back after repossession.

If the lender already sold the vehicle at auction and you receive a bill, you likely have a “deficiency balance.” A deficiency balance is the amount remaining when the sales proceeds aren’t adequate to cover what you owe. You can erase a deficiency balance by filing for bankruptcy.

Meet With a Bankruptcy Lawyer

Chapter 7 can buy you a little time, but Chapter 13 is usually the better tool if you’re behind on car payments and want to keep your vehicle. A bankruptcy attorney will consider your income, debts, and property and help you decide whether Chapter 7 or 13 will best meet your goals. Most people find the fees associated with hiring a bankruptcy lawyer worth it, and in many instances, the initial consultation is free. If you'd like more information, consider:

• learning what you should know about filing for bankruptcy, and
• seeing whether you qualify to erase debt in a Chapter 7 case.

If you don't think you can afford legal help, you'll want to learn creative ways to hire a bankruptcy lawyer when you believe you can’t afford the cost.