My car was repossessed. Can Chapter 7 help?

If your lender has repossessed your car, filing for Chapter 7 bankruptcy might allow you more time to get your car back. Even if you’re not successful, Chapter 7 can help by wiping out your responsibility to pay the vehicle loan. Read on to learn more about how Chapter 7 bankruptcy can help you after your car gets repossessed.

Getting Your Car Back After Repossession

Understanding the repossession process is your first step. Once repossessed, the lender will sell the car at auction and use the proceeds to pay down your loan. How quickly your car will go to auction will depend on your lender as well as state law, but in most cases, the lender will sell your car within a couple of weeks.

The key to getting your car back is stopping the process before auction. If the lender has sold your car already, Chapter 7 bankruptcy generally can’t help you get it back. But, if you file before the sale, you’ll still have a chance.

Delaying Repossession by Filing for Chapter 7

In most cases, an automatic stay goes into effect the instant you file for Chapter 7 bankruptcy that prohibits most creditors from continuing their collection activities without first obtaining court permission. Your lender can’t sell your car without asking the court and giving you notice through the bankruptcy. (To learn more, see Bankruptcy's Automatic Stay.)

Recovering the Car After Filing for Chapter 7

Here are some options for getting your car back while the automatic stay is in effect.

• Negotiating with the lender. The automatic stay delays the sale of your car and provides you with a good opportunity to negotiate with your lender. Your lender might be more likely to work with you knowing that a bankruptcy discharge will eliminate your liability on the loan. Your lender might 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. (Learn more about reaffirming debt in Reaffirming Secured Debt in Chapter 7 Bankruptcy.)
• Redeeming the car. When you file for Chapter 7 bankruptcy, you’re given the option to get rid of your car loan by redeeming (buying back) the car for its fair market value instead of paying the loan balance. Redemption works well when your loan balance exceeds what the car is worth. For instance, 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. You’ll redeem the loan by filing a motion with the court; however, you must have the money to pay the redemption amount in full in a lump sum payment. Your bankruptcy lawyer will likely be able to put you in contact with a redemption lender. (To learn more, see Redeeming Secured Property in Chapter 7 Bankruptcy.)

If the options above don’t work for you, but you still want to keep your car, consider filing for Chapter 13 bankruptcy instead. By filing Chapter 13 before 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 might 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.)

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 that many people have after a repossession is that they still end up owing money for the car. This occurs when the proceeds from the vehicle auction aren’t enough to cover the entire loan balance. In that case, the lender can usually come after you to collect the rest (called a deficiency balance).

Chapter 7 bankruptcy will discharge (wipe out) the entire automobile loan or a deficiency balance liability. (To learn more, see Your Car in Chapter 7 Bankruptcy.)