Will Filing For Bankruptcy Get Back a Repossessed Vehicle?

Filing for bankruptcy can sometimes get your repossessed car back. In most cases, Chapter 7 or Chapter 13 gives you a real shot at it, but only if you move quickly. The court's automatic stay stops most collection activity the moment you file, and depending on your chapter, you can redeem the car, reaffirm the loan, or catch up through a repayment plan. Here's what each option looks like, plus what to do if the car's already been sold at auction.

The table below compares how Chapter 7 and Chapter 13 handle a repossessed car so you can see, at a glance, which one fits your situation.

How Chapter 7 Bankruptcy Can Help Get a Repossessed Car Back

Chapter 7 gives you two main tools to get a repossessed car back: redeeming it for its current value or reaffirming the loan on new terms. Which one applies depends on whether the lender has already repossessed the car by the time you file.

If Your Car Was Already Repossessed Before Filing

You can get the car back after filing if you move quickly and before it’s sold at auction. Although the time between repossession and auction varies depending on the state you live in, in many instances, it’s around ten days.

When You'll File a Motion

In practice, car loan lenders won't hand back the car without a court order, which usually means you'll need a lawyer to file a motion asking the court to compel the lender to turn over the vehicle. Courts around the country don't all agree on how quickly or automatically a lender must comply, so your timeline can depend heavily on where you file. Once you have the car back, you'll still have to either redeem the car or reaffirm the contract to keep it (more below). (11 U.S.C. § 542(a).)

When the Trustee Can Recover the Car

Legally, if you have nonexempt equity in your car, the lender must return it to the Chapter 7 trustee because it's part of the bankruptcy estate, and repossession is considered an illegal preference. An illegal preference means a creditor was "preferred" by receiving payment within 90 days of your bankruptcy.

However, the problem with this scenario is that if the car has nonexempt equity, the trustee will likely sell it for the benefit of your creditors. To keep it, you'd need to pay the trustee an amount equal to the nonexempt equity in addition to what you'd be required to pay the lender. (11 U.S.C. § 547(b).)

If the Lender Hasn't Repossessed Your Car Yet

If your car hasn't been repossessed yet, the automatic stay stops the lender from taking it the moment you file, though the lender can ask the court to lift the stay and proceed anyway. To keep the car for good, you'll still need to redeem it or reaffirm the loan, explained below.

You'll likely have already told the court whether you intended to invoke one of these options when you fill out the Statement of Intention in Chapter 7 form. You must file this form within 30 days after your bankruptcy filing or by the date set for your meeting of creditors, whichever comes first. The form is often included with your initial paperwork to avoid missing the deadline. (11 U.S.C. § 521(a)(2)(B).)

For a full breakdown of how Chapter 7 can delay or prevent a pending repossession, see Will Chapter 7 Bankruptcy Prevent a Car Repossession? 

Redeem the Property

Chapter 7 bankruptcy allows you to buy the car back from the lender in a lump sum. Better yet, you redeem it at the "replacement value," not the outstanding loan balance, which in many cases is more than the car is worth. So instead of paying off the full loan, you pay what a retail merchant would charge for a car of the same age and condition. The Kelley Blue Book is a good place to start figuring out that number. (11 U.S.C. § 722.)

Reaffirm the Car Loan

Another option is to reaffirm the debt with the lender. Here, you and the lender agree to new payment terms. You might wrap your outstanding payments into a new loan amount, or tack them onto the end of the repayment period. Think carefully before reaffirming a car loan (or any debt, for that matter). Once you reaffirm, your liability for the loan survives your bankruptcy discharge. So if you default again later and the car is repossessed a second time, you're still on the hook for the deficiency balance, which is whatever's left after the lender sells the car and applies the proceeds to your loan. (Give up the car during bankruptcy instead, and that deficiency liability gets wiped out.) (11 U.S.C. § 524(c).)

One more thing to watch for is whether you have significant nonexempt equity in your car that isn't covered by a bankruptcy exemption (many people with car loans don't, but it happens). In that case, the bankruptcy trustee can sell it and distribute the proceeds to your creditors.

How Chapter 13 Bankruptcy Can Help Get a Repossessed Car Back

Chapter 13 lets you keep your car by repaying your loan arrears through your repayment plan rather than paying a lump sum. File quickly enough after repossession, and this option can restore your car while letting you spread the missed payments out over time.

You'll repay any car loan arrears through your Chapter 13 repayment plan, so as long as you can make your regular car note and plan payments, you get to keep the car. The automatic stay applies here too, so it should stop any pending repossession sale. (11 U.S.C. § 1322(b)(5).)

While the court reviews your case, you’ll likely pay monthly "adequate protection" payments to cover any decline in the car's value until your plan is confirmed. And remember, redemption isn't on the table in Chapter 13. Paying the car's replacement value in one lump sum is a Chapter 7-only option.

Filing for Chapter 13 bankruptcy is no easy feat, though. You'll commit to a three- to five-year payment plan, and it's rarely worth going that route just to save a car.

Other Ways to Get Your Car Back and Next Steps

If bankruptcy isn't the right fit, you might still be able to get your car back without filing for bankruptcy. In many states, you have the right to reinstate the contract (by making all back payments and covering repossession and storage costs) or redeem the property (by paying off the entire loan in one lump sum, plus costs). Act promptly, and either option can get your car back after repossession.

No matter which path you choose, speed is what makes or breaks the outcome. Talk to a bankruptcy attorney right away, decide between redemption, reaffirmation, or a Chapter 13 plan, and get your paperwork filed before your car goes to auction.