If your car has been repossessed, filing for Chapter 7 bankruptcy may allow you more time to negotiate with your lender and get your car back. If you don’t want the car back, Chapter 7 can wipe out your liability for a deficiency balance. Read on to learn more about how Chapter 7 bankruptcy can help you if your car was repossessed.
After repossessing your car, your lender will either keep it or sell it to a third party. Most lenders will sell your car to satisfy all or a portion of your loan. How quickly your car will be sold depends on your lender as well as state law. However, in most cases the lender will sell your car within a couple of weeks. If your car has already been sold, Chapter 7 bankruptcy generally cannot help you get it back. But if you file prior to the sale, you still have a chance.
The instant you file for Chapter 7 bankruptcy an automatic stay goes into effect. The stay prohibits most creditors from continuing their collection activities without first obtaining court permission. This means your lender cannot sell your car without asking the court and giving you notice through the bankruptcy.
To learn more, see Bankruptcy's Automatic Stay.
While you are protected by the automatic stay you have some options to get your car back. Below, we discuss them in more detail.
Since the automatic stay delays the sale of your car, this is a good opportunity for you to negotiate with your lender. Because a bankruptcy discharge eliminates your personal liability on the loan, your lender will be more likely to work with you on curing your default. Your lender may even be willing to modify the terms of your agreement to lower your payment amount, loan balance, or interest rate. However, you will generally need to reaffirm the debt (make yourself personally liable again) after working out the new terms. (To learn more about reaffirming debt, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.)
When you file for Chapter 7 bankruptcy, the Bankruptcy Code gives you the option to get rid of your car loan by redeeming (buying back) your car for its fair market value instead of the loan balance. So if your loan balance is greater than what your car is worth, you can file a motion with the court to redeem your car and own it free and clear. However, you must have the money to make a lump sum payment in order to redeem. (To learn more, see Redeeming Secured Property in Chapter 7 Bankruptcy.)
Example. If your car is worth $2,000 but your loan balance is $5,000, you can redeem your car by paying the lender $2,000 and own it free and clear after your bankruptcy.
If you still want to keep your car but the options above don’t work for you, consider filing for Chapter 13 bankruptcy instead of Chapter 7. By filing for Chapter 13 bankruptcy prior to the sale, you can force the lender to return your car and you can pay off the loan through your repayment plan over the next three to five years. You may even be able to reduce your principal balance or interest rate by cramming down your car loan. (To learn more, see Your Car in Chapter 13 Bankruptcy.)
Chapter 7 bankruptcy can help you even if you don’t want the car back. If your car is sold but the proceeds are not enough to cover your entire loan balance, the lender can usually come after you to collect the rest. The unpaid balance is called a deficiency. Chapter 7 bankruptcy discharges (wipes out) your liability for a deficiency balance. (To learn more, see Your Car in Chapter 7 Bankruptcy.)