Chapter 7 bankruptcy itself does not provide a way to catch up on overdue car payments. However, Chapter 7 bankruptcy can temporarily stave off the repossession of your car or free up other income that you can devote to your car payments.
Your Car Loan and Lien in Chapter 7 Bankruptcy
Car loans are secured debts. A secured debt has two parts: (1) your personal obligation to pay back the loan; and (2) the lender’s security interest in your car, called a lien. Because the lender has a lien attached to your car, if you fail to pay the loan, the lender can enforce the lien by repossessing your car.
When you file for Chapter 7 bankruptcy, you can eventually wipe out your personal obligation to pay the car note, but the lien remains. This means that if you fail to make payments, the lender can repossess your car.
Making Up Car Loan Arrearages
Chapter 7 bankruptcy does not have a mechanism for repaying overdue car payments. (Chapter 13 bankruptcy, however, will let you make up past due amounts through your Chapter 13 repayment plan. To learn more, see our Your Car in Chapter 13 Bankruptcy.) So filing bankruptcy will do nothing to prevent an eventual repossession of the car. However, you may be able to make up the payments outside of bankruptcy.
If you are able to get current on your car loan payments, you still have to take further steps to keep your car in the bankruptcy. To learn more, see The Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy?
Here are some ways you may be able to get current on your car loan.
Reducing Your Debt Load Through Chapter 7 Bankruptcy
If you are able to discharge other debts, you may be able to free up enough money so that you can make up your overdue car payments and better afford ongoing payments in the future.
Working With Your Lender to Catch Up on Overdue Payments
Just because you can’t make up car loan arrears in Chapter 7 bankruptcy, doesn’t mean you can’t try to get your lender to agree to accept some form of payment plan. For example, you could tell the lender you’ll pay extra for a few months until the arrears are paid. Or you could ask the lender to tack the missing payments onto the end of your car loan contract. The lender doesn’t have to agree to a workout, but it might.
The Automatic Stay: A Temporary Stop to Car Repossessions
When you file for bankruptcy, the automatic stay goes into immediate effect. The automatic stay prevents almost all of your creditors from continuing with any collection actions, including repossessions or foreclosures. (To learn more, see How Bankruptcy Stops Your Creditors: The Automatic Stay.)
If you are behind in your car payments and you file for Chapter 7 bankruptcy, your car note lender cannot legally repossess your vehicle. Once you file, immediately notify your lender so it stops all collection actions (the court will notify your lender of the bankruptcy, but it might take a few days or more).
The automatic stay is not absolute. Your car loan lender can ask the bankruptcy court to “lift” (remove) the stay as to the car loan. If you are behind in your car payments and don’t have a lot of equity in the car, the court will likely lift the stay. If that happens, the lender can continue with collection actions against you, including repossession of your vehicle.
Surrendering the Car
If you don’t want to keep your car, or you realize you won’t be able to keep it, you can surrender it to the lender. If you surrender your car during your Chapter 7 bankruptcy, or your car is repossessed (and you haven’t reaffirmed the loan), you won’t owe the lender a deficiency balance.
A deficiency balance is the difference between what the lender gets when it sells your car at auction (after deducting costs of sale) and your remaining loan balance. If you owe more than the car is worth, you may end up owing the lender money after the sale of your car.
CAUTION: If you’ve reaffirmed your car loan in bankruptcy, you will be on the hook for a deficiency balance. To learn more see, Reaffirming Secured Debt in Chapter 7 Bankruptcy.