If you fall behind on making your car payments, the lender may consider repossessing the vehicle. Filing a Chapter 7 Bankruptcy will temporarily stop your car lender from repossessing your car and will allow you more time to resolve any outstanding balance.
As soon as you file a Chapter 7 bankruptcy case, the “automatic stay” of federal bankruptcy law immediately goes into effect. The automatic stay prohibits creditors from continuing collection activities, including repossession of your vehicle. The automatic stay is imposed from the time a bankruptcy case is filed until the discharge order is entered, which is about a three-month process.
However, the lender can file a motion for relief from the automatic stay with the bankruptcy court. The lender will have to show that its interests are not adequately protected because you are in default on your loan. You will then have an opportunity to oppose the motion at a hearing. A hearing on a motion for relief from stay is usually not heard for at least forty-five days after the bankruptcy is initially filed. If you are behind on your car payments because you were having difficulty paying all of your bills a Chapter 7 bankruptcy may assist you by relieving the need to pay unsecured creditors, like loans, credit cards, and payday loans, and allowing you time to get caught up on your car payments once you no longer have to pay those unsecured debts.
If you are not able to get caught up on your car payments on your own once the bankruptcy is filed, there are a couple of other options to avoid having your car repossessed in a Chapter 7 bankruptcy.
- First, you may be able to negotiate new terms once you file for Chapter 7 bankruptcy. A Chapter 7 bankruptcy eliminates your personal responsibility to pay the car note (it does not eliminate the lien on your car). Therefore, if the lender eventually repossesses and sells the car, they have no ability to recover any of the deficiency from you personally. This usually gives the lender some incentive to work with you to cure the past due payments and allow you to keep the car, because they do not want to go through the expense of a repossession, unless there isn’t another option. Sometimes a lender will allow you additional time to catch up the past due payments, forgive some interest or reduce the interest rate for the life of the loan.
- Second, you may be able to do what is referred to as a redemption. In a redemption you pay the lender the fair market value for your car, and the rest of the balance on the loan is written off. A redemption can be especially helpful if your car is worth a lot less than the loan amount. For instance, if you owe $15,000 on your car loan, but the fair market value for the car is only $5,000, you can redeem the car by paying the lender $5,000. After the redemption, the remaining $10,000 is wiped out in the bankruptcy.
If those options do not work for you or if you decide the you do not want to keep the car, you may decide to surrender the car in a Chapter 7 bankruptcy. By filing bankruptcy, you may get to keep the car an extra two months without making payments while you look for another vehicle. Once the lender repossesses the car or you surrender the car to the lender, the deficiency balance is wiped out.
If you are behind on your car payments and you are concerned your car will be repossessed, you should speak to an experienced bankruptcy attorney as soon as possible to improve your chances of retaining your vehicle. Our firm has handled thousands of clients through the bankruptcy process and we take pride in finding the best solution for their particular financial needs and goals. We look forward to speaking with you and providing you with the same level of exceptional service.
Disclaimer: This blog/website is made available by Smith, Barden & Wells, PC for educational purposes only, as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog/website, you understand that there is no attorney-client relationship between you and Smith, Barden & Wells, PC. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your jurisdiction.
