Will Chapter 7 Bankruptcy Prevent a Car Repossession?

Learn how Chapter 7 bankruptcy can help if you are behind on your car loan.

By , Attorney · University of the Pacific McGeorge School of Law

Chapter 7 bankruptcy can delay car repossession temporarily. However, you'd likely be more successful filing for Chapter 13 if you're behind on your car payments and want to keep your car. In this article, you'll learn:

  • why Chapter 7 bankruptcy can't permanently prevent a car repossession
  • how Chapter 7 can temporarily delay the lender from repossessing your car, and
  • why the lender might work with you, but you shouldn't count on it.

We also explain what filers should do to ensure they don't lose a car in Chapter 7 bankruptcy and options to explore if your vehicle is about to be repossessed.

Once you've learned what will happen to your 401(k) in bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.

Can Chapter 7 Prevent a Car Repossession?

Both bankruptcy Chapters 7 and 13 will stop a repossession that hasn't yet occurred. If you're worried that your lender is considering repossessing your car, you'll want to act fast. You'll want to determine which chapter will work best for you and get it on file as soon as possible.

Learn how a skeleton or emergency bankruptcy filing can help you prevent repossession quickly.

How Chapters 7 and 13 Help Filers Stop Car Repossession

When you file for bankruptcy, the court tells your creditors to stop collecting or taking your property by putting an "automatic stay" in place. 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.

Find out why the automatic stay might not protect you if you've filed for bankruptcy recently.

Do I Have to Pay My Balance to Stop Repossession in Bankruptcy?

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 Bankruptcy?

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.

What Are My Chapter 7 Repossession Prevention Options?

You should be prepared to catch up on your payments, renegotiate your loan, or pay your car's actual value through redemption. However, while these options are available, they take effort to implement and don't always work.

We explain the best strategy for keeping your car in Chapter 7 in the "How to Make Sure You Don't Lose a Car in Chapter 7 Bankruptcy" section below.

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 and increase the monthly payment or extend the loan length.

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.

Catch Up on Your Payments

Suppose you can fix your default by paying the overdue payments, fees, and costs. Typically, the lender will let you continue paying the monthly amount and not repossess your car. 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.

Learn your options for hiring a bankruptcy lawyer when you can't afford the cost.

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. Redeeming a car can be great if your vehicle is worth significantly less than you owe. However, redemption is also relatively expensive, and here's why.

You start the process by filing 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 one lump sum payment.

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

Most people want 100% assurance that they won't lose their car in Chapter 7 bankruptcy, and it's possible to be in that position. But to keep your car in bankruptcy, you must get past both the car lender and the Chapter 7 bankruptcy trustee.

Here's what you'll need to do to make sure you don't lose your car in Chapter 7 bankruptcy:

If you meet both requirements before filing, you'll keep your car. If you can't meet one or both, it's possible to fix the problem using one of the abovementioned techniques, but no one can guarantee success.

Will Filing for Chapter 13 Bankruptcy Help Me Prevent Repossession?

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.

How Much Time Will I Have to Prevent Car Repossession in Chapter 13 Bankruptcy?

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.

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. Learn how to calculate a Chapter 13 plan payment.

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

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

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 the cost, and in many instances, the initial consultation will be free.

Find out if you should hire a bankruptcy lawyer.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

Schedule A/B: Property

Schedule C: The Property You Claim as Exempt

Statement of Intention for Individuals Filing Under Chapter 7

Chapter 7 and 13 Bankruptcy Form List

Bankruptcy Document Checklist

More You Might Like

How to Value Your Car in Bankruptcy

Keeping Two Cars in Chapter 13 Bankruptcy

Deficiency After Car Repossession: Will I Still Owe Money?

Reaffirmation Agreements in Chapter 7 Bankruptcy

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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