Can the Lender Repossess My Car During Chapter 7 Bankruptcy?

If you are in Chapter 7 bankruptcy, the automatic stay order makes it unlawful for most creditors to collect against you, including your car loan lender. As long as you remain in Chapter 7 bankruptcy, your car lender can't repossess your car without first getting permission from the bankruptcy court.

Learn about:

• the Chapter 7 repossession process
• when your lender can repossess your car, and
• how to avoid car repossession in Chapter 7 bankruptcy.

We have other articles to help you learn what happens to cars in bankruptcy. You'll find links to additional resources at the end of the article.

Your Lender Must Ask Permission to Repossess Your Car in Chapter 7 Bankruptcy

A lender must file a motion asking the court to lift the automatic stay, and the court must grant it before the lender can repossess your vehicle. The court will approve a request if the lender:

• has a lien allowing the lender to repossess your car, and
• will lose money if you don't pay your loan payments or fix the default.

If you oppose the motion, the court will set a hearing, and the judge will hear each side's argument. Ways to oppose the motion include:

• providing receipts proving you made the payment, or
• demonstrating the car has an "equity cushion" or enough equity to protect the lender from loss resulting from not receiving payments during the bankruptcy case and the car's depreciation.

If you can't show that the car will be worth enough to cover the amount you owe at the end of the Chapter 7 bankruptcy case or otherwise fix the default problem, most Chapter 7 bankruptcy judges will grant the motion. Your lender will be able to repossess the car during your Chapter 7 bankruptcy case.

How to Avoid Car Repossession During Chapter 7 Bankruptcy

Here are several ways to avoid repossession in Chapter 7 bankruptcy and keep your car.

Fix the Problem Before Filing for Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, the most common reason a lender will file a motion to repossess your car is the same outside of bankruptcy: failure to make payments (car insurance could be an issue, but it's rare).

The best way to avoid a problem and keep your car in Chapter 7 bankruptcy is to be current when you file and to continue making payments after your Chapter 7 case ends. Unlike Chapter 13 bankruptcy, Chapter 7 doesn't have a mechanism to help filers catch up on car payments.

Learn more about filing for bankruptcy on a car loan and keeping the car and the differences between Chapters 7 and 13.

Cure the Car Loan Default in Chapter 7 Bankruptcy

"Curing the default" or paying what you owe after the lender files the motion to lift the stay might work if the court believes you can keep up the payments, but it doesn't happen often. Not only is it hard to come up with the money necessary to cure, but most filers would have paid before filing for Chapter 7 bankruptcy if it had been possible.

Negotiate With Your Lender During Chapter 7 Bankruptcy

If you need your car, don't rely on this method. Your lender might—but probably won't—be willing to reduce your payments, interest rate, or even principal balance. But that's not to say it's not worth a try. However, keep in mind that you'll sign a reaffirmation agreement and remain personally liable for the car loan despite your bankruptcy discharge.

Redeem Your Car in Chapter 7 Bankruptcy

You also can "redeem" or buy back your car in Chapter 7 bankruptcy for its fair market value. However, not everyone can do this because you must file a motion with the court and pay in full in one payment.

This option might be attractive if your car is worth significantly less than your loan balance. And when you redeem your car by paying the lender its market value, you will own it free and clear after Chapter 7 bankruptcy, so you won't risk losing it through repossession.

Example. If you own a car worth $3,000 but have $7,000 remaining on your car loan, you can pay the lender $3,000 to redeem the vehicle and owe nothing further.

To learn more about car repossession and your options for dealing with your car loan in Chapter 7 bankruptcy, see Chapter 7 Bankruptcy and Your Car.

You Must Also Protect Your Car Equity in Chapter 7 Bankruptcy

Satisfying your car lender by staying current is only one part of keeping your car in Chapter 7 bankruptcy. You must also protect the car's equity with a bankruptcy exemption. Otherwise, you'll lose the car to the Chapter 7 trustee responsible for your case.

In Chapter 7 bankruptcy, the bankruptcy trustee sells property you can't protect with a bankruptcy exemption for the benefit of creditors. Most states' motor vehicle exemptions allow you to protect a particular amount of vehicle equity—the amount remaining after selling the car and paying off the loan. But your state might let you use a wildcard exemption, too. If your equity is less than the exemption amount, you'll be able to keep it.

Before distributing any funds, the trustee must first pay off the car loan and return any exemption amount to the debtor.

Example 1. Tawny owns a car worth $2,500, and her state's motor vehicle exemption is $3,500. The trustee won't sell her car because the bankruptcy exemption protects all Tawny's equity.

Example 2. Abigail's car is worth $20,000. She still owes $5,000 on it, leaving her $15,000 in equity. She can claim a bankruptcy exemption of $5,000. The trustee will sell the vehicle, pay off the lender, give Abigail $5,000, deduct sales costs and the trustee's fee, and distribute the remaining $10,000 to creditors.

Keep in mind that some trustees will allow the debtor to pay for nonexempt equity and keep the car. Usually, the trustee gives the bankruptcy filer a discount because the trustee can avoid sales costs. Learn more about your car in Chapter 7 bankruptcy.

If you have equity you can't protect or overdue payments, consider filing for Chapter 13 bankruptcy. You can reimburse your creditors for the nonexempt equity and catch up on past-due payments through your three- to five-year repayment plan. Learn more in Your Car in Chapter 13 Bankruptcy: An Overview.

What Should I Do If My Car Was Never Repossessed After Bankruptcy?

If the bank refuses to repossess the car after you give the lender the proper notice of your wish to surrender the vehicle and make the car available, you'll likely be able to keep it. If you want to force the lender to take it, you might have to take legal action. In both cases, your bankruptcy lawyer can explain the steps you should take next.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.