If you've had your vehicle repossessed because you haven't kept up with the payments, you might be wondering if you can get your car back by filing for bankruptcy. While the exact circumstances vary by state, in most cases, the answer is yes—filing for bankruptcy can assist you in getting your vehicle back. The key is to act quickly and to know what you need to do to make this happen.
If you default on your car loan, the lender can repossess your automobile. Once the lender has your car in its possession, the lender can sell it at auction to cover the remaining balance on your car loan.
The primary power of Chapter 7 and Chapter 13 bankruptcy—the two types of bankruptcy most people choose between—is that when you file for bankruptcy, the court issues an order called an "automatic stay” prohibiting most creditors from engaging in collection activities. The creditor must stop in its tracks which gives you more time to take steps to get your car back. The process you’ll take will depend on whether you file for Chapter 7 or Chapter 13.
Learn more about how car repossessions and auto loan charge offs work.
Here’s what you can expect in Chapter 7 bankruptcy.
If you’re behind in your payments and file for bankruptcy, the automatic stay will put a stop to a lender’s attempt to repossess your car. However, the lender can file a motion to lift the stay, which essentially asks the bankruptcy court to allow the lender to proceed with the repossession. Most courts will let the lender go forward with the repossession unless you plan to invoke one of the below remedies.
You’ll likely have already told the court whether you intended to invoke one of the options when you fill out the Statement of Intention in Chapter 7 form. (The form gets included with your initial paperwork or is filed shortly after that.)
Redeem the property. Chapter 7 bankruptcy allows you to buy the car back from the lender in one lump sum. An added bonus, you redeem the car in an amount equal to the "replacement value" of the car. So, rather than paying off the outstanding loan balance (which in many cases is more than the car is worth), you can get the car back by paying what a retail merchant would charge for the car given it's age and condition. You can get a good idea of what this would be by using the Kelly Blue Book (www.kbb.org).
Reaffirm the car loan. Another option is to reaffirm the debt with the lender. When you do this, you and the lender agree to new payment terms. For example, you may be able to wrap your outstanding payments into a new loan amount, or tack them onto the end of the loan repayment period. You’ll want to think carefully before reaffirming a car loan (or any debt for that matter). When you reaffirm the debt, your liability for the loan will not be discharged at the end of your bankruptcy. So if you default on the car loan and the car is repossessed later, you will be liable for the deficiency balance—the amount remaining after the lender sells the car and applies the proceeds to your loan. (By contrast, if you give up the car during the bankruptcy, your liability for any deficiency gets discharged).
Keep in mind, however, that if you have significant nonexempt equity in your car (most folks with car loans don't), then the bankruptcy trustee is entitled to sell your car and distribute the proceeds to your creditors. To learn more about this, see Bankruptcy Exemptions -- What Do I Keep When I File for Bankruptcy?
If your car was repossessed before you filed for bankruptcy, you might be able to get the car back by filing for bankruptcy. But you must act quickly. Generally, once the car is sold at auction, you won't get it back. The time period between repossession and auction sale varies by state but is often around ten days.
Legally, if you have nonexempt equity in your car, the lender must return the car because it is part of the bankruptcy estate, and the repossession is considered to be an illegal preference. (An illegal preference means a creditor was "preferred" by receiving payment within 90 days of your bankruptcy. The trustee has the power to decide who gets paid, not creditors.) In practice, however, car loan lenders won't return the car without an order from the court, which usually means you'll need help from a lawyer.
Once you have the car back, you'll still have to either redeem the car or reaffirm the contract in order to keep the car.
If you were already considering filing for Chapter 13 bankruptcy, then if you do so quickly you might be able to keep your car. In Chapter 13 bankruptcy, you can repay any car loan arrears through your Chapter 13 repayment plan. So, if you can make your regular car note payment and your plan payments, you'll be able to keep your car. The automatic stay applies to Chapter 13 too, so you should be able to stop any pending repossession sale.
However, filing for Chapter 13 bankruptcy is no easy feat. You'll have to pay into a three- to five-year payment plan, and it's rarely worth filing for Chapter 13 bankruptcy just to save your car.
Before you run to the bankruptcy courts, consider your other options for getting your car back. 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 the entire car loan in one lump sum along with costs). If you do so in a timely fashion, you can get your car back after it has been repossessed. To learn more about these options, see Car Repossessions and Auto Loan Charge Offs.