Car Repossession: What Is the Difference Between Reinstatement and Redemption?

If you redeem your car, you pay off the entire car loan balance plus repossession costs in a lump sum and get the vehicle back (although in Chapter 7 and 13, there are ways to pay no more than the vehicle’s value and keep the car). Reinstatement means catching up on missed payments and fees so the loan resumes on its original schedule. Both can get a repossessed car back, but they differ in cost, eligibility, and how fast you need to move. Here's how each works, what each costs, and what to do if you can't afford either.

Redeeming Your Car After Repossession

Redemption lets you buy back your car from the lender by paying the full amount you owe, plus the lender's repossession costs, in a single payment. Generally, you can exercise your right to redeem the car until the lender sells or otherwise disposes of it.

Do You Have the Right to Redeem?

Yes. Every state gives borrowers some form of redemption right, though the specifics vary by state law and by your loan contract, including:

• how long the lender must keep the car before it is sold (commonly ranging from about 10 days to three weeks, depending on your state and loan contract, and if sold, any sale surplus must be refunded to the borrower)
• what kind of sale the lender must use (mass vehicle auctions are common)
• how the lender must notify you of your right to redeem, how and when it plans to sell the car, and how much it will cost you to redeem it.

How Much Does It Cost to Redeem?

Redeeming your car typically costs the full loan balance plus the lender’s reasonable repossession expenses, towing charges, storage fees, cleaning and repair expenses, attorney’s fees, and other unpaid costs, such as late fees. These fees alone could amount to hundreds of dollars.

The terms of the redemption may be negotiable, though. The lender may be willing to accept less than the full amount owed or to discount the repossession fees to reduce losses it might incur if it sells the car for less than its value.

Reinstating the Loan After Repossession

Reinstatement lets you get the car back by bringing your loan current, rather than paying it off entirely. To reinstate, the lender will typically require that you bring all payments current, pay any outstanding fees under the contract, such as late payment fees, and reimburse the lender for the costs of repossession.

You must still make timely payments and maintain adequate insurance coverage. Expect the lender to require proof of insurance before returning the car to protect the lender’s collateral interest.

Do You Have the Right to Reinstate?

It depends on your state and your loan contract. In some states, the law requires that a lender allow you to reinstate the loan. Even if reinstatement is not provided for by law, however, your lender may have included reinstatement in the terms of its financing agreement with you or may have a policy that allows a borrower to reinstate.

How Much Does It Cost to Reinstate?

Reinstating usually costs less than redeeming, since you're only catching up on missed payments and fees rather than paying off the loan. Like redemption, though, lenders may be willing to negotiate the terms, including how much of the outstanding balance or repossession costs you will have to pay to get your car back, or the lender may be willing to change the terms of the remaining payment schedule.

Deadlines: Time Is of the Essence

Plan to act fast. It’s not unusual to have a very short window, commonly 10 days to a few weeks depending on your state, after repossession before the vehicle is sold at auction. Whether you can redeem the vehicle or reinstate the loan will depend on:

• the terms of the loan contract between you and the lender, and
• whether your state requires the lender to provide you with redemption or reinstatement rights.

Consider talking to an attorney or doing some research if you want to be sure of your rights, but contact the lender as soon as possible after repossession to preserve your right to redeem the car or reinstate the loan.

When Redemption or Reinstatement Make Sense

Redemption or reinstatement makes sense any time getting the car back is worth more to you than starting over. Common reasons include:

• You have equity in the car that you do not want to lose.
• The loan is nearly paid off.
• Having a repossession on your credit report will make it difficult for you to obtain another car loan for some time.
• You want to avoid being held responsible for any deficiency balance remaining after the car is sold by the lender.

What Is Car Repossession?

Car repossession is when your lender takes back your vehicle, typically after you fall behind on payments, and sells it to recover the loan balance. Most lenders use "self-help" vehicle repossession, meaning they can send someone to take the car without going to court first, as long as doing so doesn't involve a breach of the peace, such as breaking into a locked garage or using force.

If the proceeds from the sale are not enough to cover the balance on your loan plus the lender’s costs of the repossession and sale, you’ll owe the car lender the remaining amount, called a deficiency. In some cases, you might also be able to buy the car back by bidding on it at the repossession sale, though you'll be competing against other bidders and the lender isn't required to sell it to you.

What If You Can’t Afford to Redeem or Reinstate?

If you can't afford either option, bankruptcy could still get your car back or reduce what you owe on it. Filing for bankruptcy triggers the automatic stay, which immediately stops most creditor collection efforts, including a scheduled repossession sale, giving you a brief window to work something out with the lender. If the car has already been sold, however, the automatic stay won't get it back. (11 U.S.C. § 362.)

Redeeming Your Car Loan in Chapter 7 Bankruptcy

In Chapter 7, you can redeem the car by paying its current replacement value in one lump sum, rather than the full amount you owe on the loan. This is often far less than what the lender would otherwise charge to redeem the loan outside bankruptcy, especially if the car is worth less than the payoff balance.

To redeem, the car must be exempt property or the trustee must have abandoned it as being of little value to the estate, and you'll need court approval. Also, it's limited to individual debtors and to tangible personal property for personal, family, or household use. It's not available for vehicles used for business purposes. (11 U.S.C. § 722.)

You must pay the lender the redemption amount in a single payment shortly after your case is filed. If you can’t come up with the cash, through either post-filing wages or a loan from a friend or relative, you might be able to find a lender who offers redemption financing, although the interest will likely be high. If you'd rather keep the original loan terms instead of redeeming, you can reaffirm the debt and continue making payments under a new agreement approved by the court, but you'll remain on the hook for the full balance if you later fall behind again. (11 U.S.C. § 524.)

Cramming Down Your Car Loan in Chapter 13 Bankruptcy

In Chapter 13, you may be able to "cram down" your car loan, meaning you reduce the secured portion of the debt to the car's current value and pay only that amount through your repayment plan, as long as you bought the car more than 910 days before filing. Anything you still owe beyond the car's value is treated as unsecured debt, which is often paid back at only a few cents on the dollar, or sometimes not at all, alongside your other unsecured creditors. Courts also typically lower the interest rate on the crammed-down balance. (11 U.S.C. § 1325.)

If you bought the car within 910 days of filing, though, this option isn't available, and you'll have to pay the full contract amount to keep the car in your Chapter 13 plan.

With Chapter 13 bankruptcy, you can also simply propose a plan to repay the car lender over time if a cramdown isn't available to you. So, if you can't redeem or reinstate on the lender's terms, don't assume the car is gone for good. Bankruptcy might still put it back in your driveway. Start by learning more about filing for bankruptcy to get back a repossessed vehicle.