Can the Lender Repossess My Car During Chapter 7 Bankruptcy?

Yes, a lender can repossess your car during Chapter 7 bankruptcy, but you can take steps to avoid it. When you file for Chapter 7, the court issues the automatic stay order that stops most creditor collection actions, including phone calls, collection letters, lawsuits, wage garnishments, and car repossessions. (11 U.S.C. § 362(a).) The problem? It isn't absolute, and if you don't prepare properly before filing for Chapter 7, creditors can circumvent the automatic stay's protections when it expires or by obtaining court permission to proceed with repossession.

Learn how lenders work around the automatic stay in Chapter 7 car repossession and what you must do to keep your car in Chapter 7.

Protect Your Car: Understanding the Automatic Stay and Car Repossession in Chapter 7

Start by learning what's required to avoid losing a financed car to a lender in Chapter 7, which we explain below in "Steps to Avoid a Sale or Repossession in Chapter 7." Then, familiarize yourself with the pitfalls that you could run into if you don't properly protect your car from the lender and the Chapter 7 trustee appointed to oversee your case.

We discuss what you must do if your car is leased below in "What If Your Car Is Leased and Not Financed? Leased Cars in Chapter 7 Bankruptcy."

Steps to Avoid a Sale or Repossession in Chapter 7

Keeping a financed car in Chapter 7 is a two-step process because it's not just your lender you need to worry about. You must also protect the vehicle from the Chapter 7 trustee who sells property for the benefit of creditors. Here's what's required:

1. Protect the vehicle from the trustee. This element requires you to be able to protect the vehicle's equity with a bankruptcy exemption. If a bankruptcy exemption doesn't fully cover the equity, the trustee will sell it, pay off the lender, give you the exemption amount, and deduct sales costs and the trustee's fee. The trustee distributes the remaining amount to your unsecured creditors.

• Financed vehicles. Check your state exemption laws to determine whether state or federal bankruptcy exemptions are available to you and whether the "motor vehicle exemption" and "wildcard exemption" amounts protect the car's equity fully.
• Leased vehicles. The trustee will have 60 days to decide whether to take over the lease on behalf of creditors; however, this rarely occurs. Learn about leases in Chapter 7 bankruptcy.

2. Protect the vehicle from the lender. You must comply with the contract when you file and take steps to keep the automatic stay in place.

• Current payments. Most lenders won't work with you after you file for Chapter 7 bankruptcy, so if you want to keep the car, plan to be current on your payments when you file. This protects you against the lender from filing a motion asking the court to lift the automatic stay.
• Proper paperwork. File the Statement of Intention for Individuals in Chapter 7 form ("Statement of Intention") and fulfill your intention within the required timeframe. Options are discussed below.
• Previous bankruptcy filings. The automatic stay doesn't last as long, or even go into effect, if you previously filed for bankruptcy within a particular timeframe. Learn how you can lose the automatic stay after multiple bankruptcy filings.

If your car is leased, you'll find specific instructions below in the "What If Your Car Is Leased and Not Financed? (Leased Cars in Chapter 7 Bankruptcy)" section.

Avoiding a Car Sale or Repossession in Chapter 7: Car Loan Bankruptcy Options

Here are the basics you need to know—and what you should check before filing for Chapter 7—to be sure your car isn't at risk of being sold or repossessed in Chapter 7.

Protect Vehicle Equity With Exemptions

When you want to file for bankruptcy on a car loan and keep the car, the first step is to check whether your vehicle is safe from the Chapter 7 trustee. For it to be safe, you must be able to protect the equity with a bankruptcy exemption. If the equity isn't fully protected, the Chapter 7 trustee will sell it for the benefit of your creditors. Once lost, you won't need to analyze whether the lender can take it through repossession.

Pay Car Payments

One of the most effective ways to prevent car repossession in Chapter 7 is to ensure your car loan payments are current before filing your bankruptcy case. Chapter 7 bankruptcy is designed to eliminate certain debts. However, it doesn't provide a mechanism for catching up on past-due secured payments, like those for a car loan.

Either the lender will obtain permission to resume repossession by filing a motion to lift the automatic stay (more below) or will wait to repossess after the case is closed. (11 U.S.C. § 362(d).) By being caught up on payments before filing, you remove this avenue from a lender seeking repossession.

Tip. While typically most effective before filing, some debtors attempt to negotiate with their car lender even during a Chapter 7 bankruptcy. This could involve modifying loan terms. However, lenders are not obligated to agree, and this approach is best used only if you can't afford to bring payments current before filing or you aren't concerned about losing the vehicle.

Complete the Proper Paperwork

You must inform the court, trustee, and lender that you wish to retain the car, and do this by completing the Statement of Intention form. You must file and serve the Statement of Intention within 30 days after the date you file your bankruptcy petition, or before the first date set for the 341 meeting of creditors (the hearing all filers must attend), whichever is earlier. (11 U.S.C. § 521(a)(2).) Failing to file the Statement of Intention results in the automatic stay being lifted, which allows the lender to repossess your car. (11 U.S.C. § 521(a)(6).)

Tip. Although you can file this form after you file the case, many bankruptcy attorneys prefer filing it with the bankruptcy petition to ensure it's filed on time.

Avoiding a Repossession After Chapter 7: Implementing Intention

Just as important as filing the form is implementing the intention you declare within a specific timeframe. In most instances, filers must act within 30 days after the first meeting of creditors is scheduled. (11 U.S.C. § 521(a)(2).) However, you'll have 45 days when reaffirming or redeeming an auto loan. (11 U.S.C. § 521(a)(6).)

If you file for bankruptcy but fail to follow through on your stated intention within the required timeframe, the automatic stay will be lifted, allowing the lender to repossess your car without needing to first obtain permission from the bankruptcy court. (11 U.S.C. § 521(a)(7).) So you must pay close attention to these deadlines to successfully protect your car in Chapter 7 bankruptcy.

When a Lender Can Repossess Your Car: Motion to Lift Stay

While the automatic stay is a strong protection, it's not always permanent. In most cases, a lender must first obtain permission from the bankruptcy court before repossessing your car (and many request permission even if the automatic stay is lifted by law). To do this, creditors file a motion to lift the automatic stay.

The bankruptcy court will approve the motion if the lender can show that:

1. They have a valid lien on your car, which allows them to repossess it if you don't comply with the loan terms.
2. They will lose money if you don't resume your loan payments or fix the default. This often happens if the car is depreciating and you're not making payments to offset that loss.

Responding to a Motion to Lift Stay

In most cases, debtors don't oppose motions when they have no defense, and the lender will win. But if you do, you'll have an opportunity to present your side to the judge at a hearing. Ways you might successfully oppose the motion include:

• Providing proof of payment. If you can show receipts or bank statements proving you've made the required payments, the motion might be denied. You might also argue that you can catch up on the amount owed. However, when possible, the better approach would be to bring the account current before filing and avoid the need for a motion to lift the stay altogether.
• Demonstrating an equity cushion. If your car is worth more than you owe, you might argue that an "equity cushion" protects the lender from losing money even though the lender won't receive payments during the bankruptcy. If the lender must wait to repossess and sell the vehicle after the Chapter 7 case ends, sufficient equity will remain to cover the outstanding amount.

If you can't show that the car will be worth enough to cover the amount you owe for the duration of the case, or you can't fix the default, the judge will grant the motion. The lender will be able to repossess the car immediately, even though the case remains ongoing.

Tip. In most cases, you can expect a trustee who plans to sell a vehicle for the benefit of creditors to oppose a lender's motion to lift the stay. The trustee will argue that the lender won't suffer harm because an equity cushion exists, and the trustee must repay the lender's loan before using the remaining funds to repay unsecured creditors.

Example. Jon's car is worth $15,000 when he files for Chapter 7, and he owes $7,000, leaving $8,000 in equity. His state has a $5,000 motor vehicle exemption, leaving $3,000 in nonexempt equity ($8,000 - $5,000 = $3,000). If the lender brings a motion to lift the automatic stay, the trustee would likely argue against it for the following reasons: the car would be sold for unsecured creditors, the lender would be paid the $7,000 owed, and the $3,000 equity cushion would protect the lender against loss. The bankruptcy court would likely side with the trustee and deny the lender's motion, knowing that Jon would also receive $5,000 for the motor vehicle exemption.

What If Your Car Is Leased and Not Financed? Leased Cars in Chapter 7 Bankruptcy

This article primarily discusses keeping a financed vehicle in Chapter 7 bankruptcy. However, a lessor can also repossess a leased car in Chapter 7, and while many principles are similar, important differences exist.

As with a financed car, you'll use the Statement of Intention form to indicate whether you want to keep the car. Your options for a lease are typically:

• Assumption. You can indicate that you want to keep the lease. You can expect the lessor to require you to sign a new lease, and likely won't agree if you're behind on payments or other terms.
• Surrender. You can surrender the leased vehicle. The bankruptcy discharge will eliminate your responsibility to pay future lease payments and fees for things like excess mileage or wear and tear.

You'll file and serve the Statement of Intention within 30 days of the bankruptcy filing date or by the first date set for the 341 meeting of creditors, whichever occurs first. That's where the similarities end. These are the process differences you should be aware of:

• No equity to protect. Unlike a financed vehicle, you're essentially renting a leased vehicle, so there's no equity to protect through a bankruptcy exemption.
• Trustee's decision. Within 60 days of your bankruptcy filing, the trustee must decide whether to take over or "assume" the lease or to "reject" it. In most consumer (nonbusiness) cases, the trustee will reject the lease. Once the 60 days pass and the trustee rejects it, you can reclaim the vehicle.
• Communicating with the lessor. As soon as possible, you'll want to contact the lessor in writing to let them know you intend the assume the lease. The lessor can require you to make up any late payments and fees. (11 U.S.C. § 365(p).)

Learn more about unexpired leases and executory contracts in Chapter 7 bankruptcy.

Preventing a Chapter 7 Repossession: File for Chapter 13 Bankruptcy for Your Car Loan

While Chapter 7 bankruptcy offers several ways to address a car loan and potential repossession, it's not always the best solution for everyone, especially if you are behind on payments or have significant nonexempt equity in your vehicle. In certain situations, Chapter 13 bankruptcy will be a better option for retaining your vehicle.

Chapter 13 bankruptcy is often referred to as a "reorganization" bankruptcy because it allows you to propose a payment plan to your creditors over a period of three to five years. This can be particularly helpful with secured debts, such as car loans.

Here's why Chapter 13 might be a better choice for your car loan in certain circumstances:

• Catching up on past-due payments. Unlike Chapter 7, Chapter 13 allows you to include past-due car payments in your court-approved payment plan. You can stop a potential repossession by catching up on your arrears over time, rather than needing to be current before filing.
• Dealing with nonexempt equity. If your car has equity that exceeds the available Chapter 7 exemptions in your state, the Chapter 13 payment plan will let you pay the value of the nonexempt equity through the Chapter 13 plan and keep the car.
• Reducing the amount owed. Chapter 13 allows you to reduce or "cram down" the principal balance of the car loan to the car's current fair market value, and pay the reduced amount through the Chapter 13 plan. To use this option, you must have owned the vehicle for at least 910 days before filing (although the exact timeframe might vary depending on the jurisdiction's bankruptcy law).

If you want to keep your car, especially if you're behind on payments or the car has nonexempt equity, you'll want to learn more about protecting your car in Chapter 13 bankruptcy by consulting a bankruptcy lawyer.

Questions and Answers About Car Repossession During Chapter 7 Bankruptcy

Below you'll find answers to common questions about Chapter 7 car repossession.

Can my car be repossessed if I file for Chapter 7 bankruptcy?

Not immediately. When you file for Chapter 7 bankruptcy, an "automatic stay" goes into effect, which legally stops your car loan lender (and most other creditors) from taking collection actions, including repossessing your car, without court permission.

If a previous bankruptcy case was dismissed without a discharge and you're refiling, talk to a bankruptcy lawyer about whether the automatic stay will protect you. Learn about the automatic stay and multiple bankruptcy filings.

How long does the automatic stay protect my car from repossession?

The automatic stay protects your car as long as it remains in place. In Chapter 7, the stay will protect you until you receive the bankruptcy discharge, which the court typically grants about 60 days after the trustee concludes the 341 creditors meeting. However, the lender can ask the court to "lift the automatic stay" before then if they can demonstrate that they will incur a loss by not repossessing, especially if you are not making payments.

Can Chapter 7 bankruptcy help me catch up on my overdue car payments?

No, Chapter 7 bankruptcy doesn't provide a way to catch up on past-due car payments. If you're behind, you'll likely lose the car during or after Chapter 7 unless the lender is willing to work with you (and most aren't).

Can I negotiate with my car lender during Chapter 7 bankruptcy?

You might be able to negotiate better terms for a reaffirmation agreement, but getting the lender to agree is uncommon. Because the better approach for keeping a car in Chapter 7 is to be current on payments when you file, it's better to attempt any negotiations beforehand.

What is a reaffirmation agreement for a car loan in Chapter 7?

A reaffirmation agreement is a legal contract where you agree to continue making payments on your car loan and remain personally responsible for the debt, even after your bankruptcy discharge. The benefit of signing a reaffirmation agreement is that the lender can't repossess the car as long as you keep up payments.

Should I sign a reaffirmation agreement? What are the risks?

You remain responsible for the car debt when you sign a reaffirmation agreement. If you don't pay according to the terms, the lender can repossess the car and sue you for any remaining balance.

Is redemption a good option if I owe more than my car is worth?

Yes, redemption works well when your car's market value is significantly less than what you owe. For example, if you owe $7,000 but the car is only worth $3,000, you could pay $3,000 to redeem it.

How do bankruptcy exemptions affect my car in Chapter 7?

Bankruptcy exemption laws allow you to keep particular property, including some equity in a car, from being sold by the trustee. If exemptions fully protect your car's equity, the trustee can't sell it.

What are the "motor vehicle" and "wildcard" exemptions?

Most states have a motor vehicle exemption that allows you to protect a certain amount of equity in your car. Some states also have a wildcard exemption that you can use to protect any type of property, including vehicle equity. Most states also allow you to stack the wildcard on the motor vehicle exemption to protect more equity.

What happens if my car's equity exceeds available exemptions?

Your car has "nonexempt equity" when exemptions don't fully cover its equity. In Chapter 7, the Chapter 7 trustee sells nonexempt property, including vehicles, to pay your creditors. Most trustees allow filers to pay them the value of the nonexempt equity, minus a discount for sales costs, to keep the car.

If the equity in your car exceeds the available exemptions, the trustee may have the right to sell the vehicle. In some cases, you may be able to pay the trustee the amount of the nonexempt equity to keep the car.

Example. Harriet files Chapter 7 bankruptcy. Her state has a $5,000 motor vehicle exemption. Her car is worth $10,000, and she owes $7,000, leaving $3,000 in equity. Since her $3,000 equity is less than the $5,000 exemption, the trustee can't sell her car.

Example. Lori files Chapter 7 in a state with the same $5,000 motor vehicle exemption. Her car is worth $15,000, and she owes $7,000, leaving $8,000 in equity. Since her $8,000 equity exceeds the $5,000 exemption, there is $3,000 in nonexempt equity ($8,000 - $5,000 = $3,000). The trustee will sell the car unless Lori can pay the trustee $3,000 for the nonexempt equity, minus any discount allowed for sales costs.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.