If you are in Chapter 7 bankruptcy, your car loan lender cannot repossess your car or otherwise try to collect its debt without first getting permission from the court. Read on to learn more about whether the lender can repossess your car during Chapter 7 bankruptcy and ways to avoid repossession.
Filing a Chapter 7 bankruptcy creates an order called the automatic stay. The automatic stay makes it unlawful for most creditors to continue collection activities. In fact, your car lender won’t be 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.
A lender who wants to take a car during a bankruptcy case must ask the court to lift the automatic stay and allow the lender 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, the court will usually set a hearing 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. However, if you aren’t 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.)
When You Have Equity in the Vehicle
You don’t lose everything that you own when you file for bankruptcy. However, you can’t always keep all of your property, either. So, if you have equity in the car, you’ll need to determine whether you can protect it with a motor vehicle exemption.
Most states’ motor vehicle exemptions allow you to protect a particular amount of equity in a vehicle. (Equity is the amount remaining after selling a car and paying off the loan.) If your equity is less than the exemption amount, you’ll be able to keep it. What will happen to the nonexempt equity (equity that you can’t protect) will depend on the bankruptcy chapter filed. (You’ll find a complete list of exempt property in your state’s exemption statutes.)
In Chapter 7 bankruptcy, the bankruptcy trustee tasked with overseeing the case sells nonexempt property for the benefit of creditors. 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 outright worth $2,500. Her state’s motor vehicle exemption is $3,500. Because the exemption protects all of Tawny’s equity, the trustee will not sell her car.
Example 2. Abigail’s car is worth $20,000. She still owes $5,000 on it leaving her with $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, and distribute the remaining $10,000 to creditors.
Keep in mind that some trustees will allow the debtor to pay for nonexempt equity (usually at a discount because the trustee will be able to avoid sales costs) and keep the car. (For a more detailed explanation, read The Motor Vehicle Exemption: Can You Keep Your Car in Chapter 7 Bankruptcy?)
By contrast, in Chapter 13 bankruptcy you can keep your vehicle even if you have nonexempt equity. The catch is that you’ll have to reimburse your creditors for the nonexempt amount through your three- to five-year repayment plan. This portion will be in addition to other amounts that you’ll be responsible for paying. (Learn more in Your Car in Chapter 13 Bankruptcy: An Overview.)
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. This might 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 Chapter 7 Bankruptcy and Your Car.