If you fall behind in your car payments or make them erratically, the lender that loaned you money to buy the car may consider repossessing the vehicle. Once you file Chapter 7 bankruptcy, an automatic stay goes into effect, and creditors, including your car lender, are stopped from continuing their collection activities. An automatic stay stops a car lender from repossessing your car. However, the lender can ask the court to lift the stay so that it can repossess the car.
The lender can make the request by filing a motion for relief from the automatic stay with the bankruptcy court. The lender will need to show that its interests are not adequately protected because you are in default or you are not making timely loan payments. You will have an opportunity to oppose this motion, either on substantive grounds, such as when the lender fails to note payments that were actually made, or procedural grounds, such as the lender’s failure to serve the motion with adequate notice to you. In many cases, however, you will need to try to informally negotiate with your lender or cure your default. If you are not working towards a solution, the judge will lift the stay so the lender can repossess the vehicle.
If you can afford to catch up on car payments or cure your default, it is unlikely the lender will repossess the car. A car’s value drops significantly and rapidly after purchase, and your lender would rather get full payment from you, including interest payments, rather than try to sell a used car, which is worth less than the loan.
In some cases, a lender will reduce the amount of the payment or the principal balance, once it is aware that bankruptcy will result in a discharge of the remaining loan amount if the car is repossessed. If you enter into a new loan agreement with the lender, you will be reaffirming the debt, which means that you remain personally liable for the loan even after your bankruptcy discharge.
Keeping Your Vehicle With Chapter 13 Bankruptcy
Filing for Chapter 13 bankruptcy can be a good solution to avoid vehicle repossession. Once an automatic stay goes into effect, the car lender is stopped from repossessing your car until the judge confirms your debt repayment plan. Assuming the plan deals with back payments and current payments, and you make those payments going forward, the lender cannot repossess your car. If your debt repayment plan does not deal with the arrearage, or you fail to make the monthly Chapter 13 payments according to your plan, however, the lender can repossess your car. You must also make “adequate protection payments” during the period from the date you file for bankruptcy until the date the judge approves your plan. Usually, the adequate protection payments are equal to your car loan payments.
If your car is repossessed just before you file for bankruptcy, you may be able to get the car back, as long as you address repaying the arrearage when you submit your debt repayment plan. An experienced bankruptcy attorney can help you try to get your car back from the lender.