If you are in an active Chapter 7 bankruptcy, your car loan lender is prohibited from repossessing your car or otherwise trying to collect its debt. However, your lender may still be able to repossess the car during your Chapter 7 by getting permission from the court. Read on to learn more about whether your car can be repossessed during Chapter 7 bankruptcy and ways to avoid repossession.
When a Chapter 7 bankruptcy is filed, an automatic stay is created. The automatic stay makes it unlawful for most creditors to continue any collection activities. This means that your car lender is not even allowed to call you to collect its debt. So it cannot legally repossess your car after you file for bankruptcy unless it obtains court permission first.
(To learn more, see Bankruptcy's Automatic Stay.)
Since you are protected by the automatic stay, your lender must ask the court to lift the stay in order to repossess your car. The lender does this by filing a “motion for relief from the automatic stay” with the court. In the motion, the lender must show that it is the proper party in interest with a right to repossess the car and that its interests are not adequately protected because you are not making timely loan payments or are otherwise in default.
You usually have about two weeks to oppose your lender’s motion for relief. If you oppose, a hearing is normally held within thirty days from the date the motion was filed and served. The judge can deny the motion if you can show that it was procedurally flawed (it was not properly noticed and served for example) or the lender made a mistake such as misplacing your payments. Even if the motion was accurate and properly served, the judge can continue the hearing to allow you and your lender to come to an agreement yourselves. However, if you are not negotiating with your lender or attempting to cure your default, most Chapter 7 bankruptcy judges will grant your lender permission to repossess your car by lifting the automatic stay.
If you wish to keep your car, you have several options to avoid repossession.
Your lender will only want to repossess your car if your loan is in default. The most common reasons a lender will file a motion for relief from the stay is lack of payments or car insurance. If you can afford to catch up on your payments or otherwise cure your default, most lenders will not repossess your car. Of course, for debtors that are significantly behind on payments, it's often hard to come up with the money necessary to cure.
Car lenders make most of their money through interest payments on your loan. Most lenders would rather have you keep the car and continue making payments instead of repossessing it. If you are in default, consider negotiating with your lender to work out a way for you to cure your default and keep the car. Your lender may be willing to reduce your payments, interest rate, or even principal balance because bankruptcy will discharge your obligation to pay any remaining loan balance if your car is repossessed. But keep in mind that the new loan agreement will be a reaffirmation of the debt which means you will remain personally liable on the loan despite your bankruptcy discharge.
(To learn more about reaffirming a car loan, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.)
You also have the option to redeem (buy back) your car in Chapter 7 bankruptcy for its fair market value. However, you must file a motion with the court and make a lump sum payment in order to redeem. This may be an attractive option if your car is worth significantly less than your loan balance. When you redeem your car by paying the lender its market value, you will own it free and clear after the bankruptcy. (To learn more, see Redeeming Property That Secures Debt.)
Example. If you own a car worth $3,000 but you have $7,000 remaining on your car loan, you can pay the lender $3,000 to redeem the car and own it free and clear.
To learn more about car repossession and your options for dealing with your car loan in Chapter 7 bankruptcy, see Your Car in Chapter 7 Bankruptcy.