My Car Was Repossessed. Can Chapter 7 Help?

If your lender has repossessed your car, filing for Chapter 7 bankruptcy might help you get your vehicle back if you file quickly. If you can't recover your car, Chapter 7 will erase your responsibility to pay the vehicle loan. Find out more, including how filing for Chapter 7 bankruptcy can help you:

• delay repossession
• gain time to negotiate with the car loan lender, and
• pay less than you owe.

While Chapter 7 can be helpful, you'll want to consider filing for Chapter 13 if you need time to catch up on missed payments using a Chapter 13 plan.

Getting Your Car Back After Repossession: The Process

Understanding how repossession works is the first step to getting your vehicle back. Here's what to expect.

When you fall behind on a car payment, the lender can use its lien rights to recover the car. Once repossessed, the lender will sell the vehicle at auction and apply the sales proceeds to your loan balance.

How Long Do I Have to Get My Repossessed Car Back?

The key to recovering your car is stopping the process before the auction. How quickly your car will go to auction depends on your lender and state law, but in most cases, the lender will sell your vehicle within a couple of weeks.

If the lender has sold your car already, Chapter 7 bankruptcy probably won't help you get it back. File for bankruptcy before the sale for your best chance of recovery.

Delaying Repossession by Filing for Chapter 7

In most cases, bankruptcy's "automatic stay" prohibits collection activities as soon as you file for Chapter 7 bankruptcy. The stay prevents your lender from selling your car without court permission.

Learn when a creditor will ask the bankruptcy court to lift the automatic stay.

Recovering the Car After Filing for Chapter 7

Here are some ways to recover your car while the automatic stay is in effect.

Negotiating with the lender. The automatic stay delays the sale of your car and provides you with an opportunity to negotiate with your lender. With the threat of a bankruptcy discharge eliminating your loan liability, your lender might be willing to modify your payment amount, loan balance, or interest rate. However, after working out the new terms, you'll likely need to reaffirm the debt, which will make you personally liable again.

Redeeming the car. You can get rid of your car loan by "redeeming" or buying back the vehicle for its fair market value, which works well when your loan balance exceeds the car's value. For instance, suppose your car is worth $2,000, but your loan balance is $5,000. In that case, you could redeem your car by paying the lender $2,000.

Redemption requires a motion before the bankruptcy court. If granted, you'll need to pay the redemption amount in full in one lump sum. Your bankruptcy lawyer will likely be able to put you in contact with a redemption lender.

Saving Your Car in Chapter 13 Bankruptcy

If the options above don't work for you, but you still want to keep your car, consider filing for Chapter 13 bankruptcy. By filing Chapter 13 before the sale, you can force the lender to return your vehicle and pay off the loan through your repayment plan over three to five years. You might even be able to reduce your principal balance or interest rate by cramming down your car loan.

Discover more about your car in Chapter 13 bankruptcy.

When You Can't (or Don't Want to) Keep the Car

Chapter 7 bankruptcy can help you even if you don't get the car back. A common issue many people have after repossession is that they still owe money for the car. When the proceeds from the vehicle auction aren't enough to cover the entire loan balance, the lender can usually come after you to collect the remaining "deficiency balance."

Chapter 7 bankruptcy will "discharge" or wipe out the entire automobile loan or a deficiency balance liability.

What if My Car Was Already Sold?

If the lender auctioned your car before you filed for bankruptcy, it's likely too late to recover your vehicle. However, you can eliminate a deficiency balance in Chapter 7 bankruptcy.

What Should I Do Next?

A local bankruptcy lawyer will be in the best position to explain your rights under state laws and the options available to you, including filing for bankruptcy. Learn about options when you can't afford a bankruptcy lawyer.

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.