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.

Can Chapter 7 Bankruptcy Stop Car Repossession?

Yes. Filing for bankruptcy stops most collection activity, including car repossessions. The court puts an "automatic stay" order in place that prohibits creditors from collecting debts and recovering property. (11 U.S.C. § 362(a).)

Understanding the Automatic Stay: How It Stops Car Repossession

The automatic stay is a legal protection that takes effect immediately when you file your bankruptcy petition. It prevents your lender from selling your car without court permission, giving you time to explore your options.

It's essential to recognize that the automatic stay protection is not absolute. Lenders can and frequently do file motions requesting relief from the stay. Also, the stay might be limited or not put in place at all if you've recently filed and dismissed multiple bankruptcy cases.

How Vehicle Repossession Works When You File Chapter 7 Bankruptcy

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 After Filing Bankruptcy?

To recover your car, you must stop the lender from selling it at auction. How quickly your car will go to auction depends on your lender and state law. For instance, some states allow sale within 7 to 10 days, while others require 15 to 21 or more days, so timing varies significantly across states.

Repossession Notice Requirements by State

• Texas. No specific repossession notice is required before repossession, and sales can occur as quickly as 10 days after repossession. (Texas Business & Commerce Code §§ 9.611, 9.614.)
• California. Lenders must provide at least 15 days' notice before default and 10 days' notice of intent to sell after repossession. (California Civil Code § 2983.2; California Financial Code § 22328.)
• Connecticut. Lenders must provide 10 days' written notice before repossession and 15 days' notice before sale. (Connecticut General Statutes §§ 36a-785(b),(d).)
• Wisconsin. Requires 21 days' notice before repossession. (Wisconsin Statutes § 425.205(1g); Wisconsin Statutes § 409.503.)

Find Your State's Car Repossession Timeline and Requirements

State laws vary significantly, so you'll want to act quickly and consult with a local bankruptcy attorney for help. Filing for bankruptcy before the sale gives you the best chance of recovery. If the lender has already sold your car, Chapter 7 probably won't help you get it back.

What You Plan to Do With the Car: Filing the Statement of Intention

You'll have 30 days from the time you file your Chapter 7 case or by the date set for the meeting of creditors, whichever is earlier, to tell the court what you intend to do with the vehicle. You accomplish this by filing the Statement of Intention for Individuals Filing Under Chapter 7 (Official Form 108). (11 U.S.C. § 521(a)(2).)

If you don't file the form on time, you risk losing the protection of the automatic stay for your vehicle. The statement must specify whether you intend to surrender the property, redeem it, or reaffirm the debt.

Three Strategies to Keep or Recover Your Car in Chapter 7 Bankruptcy

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.

Car Loan Reaffirmation in Chapter 7: How It Works and What to Know

After working out new terms with your lender, you'll likely need to reaffirm the debt, which will make you personally liable again. (11 U.S.C. § 524(c).) A reaffirmation agreement must be filed with the court before your discharge is entered.

Suppose you fall behind on payments after bankruptcy. In that case, the lender can repossess the car and sue you for any remaining balance. You'll want to consider reaffirmation carefully—including the following—because it removes the protection bankruptcy would otherwise provide:

• You must be able to afford the payments based on your current income and expenses.
• If you have an attorney, they must certify that reaffirmation won't cause undue hardship.
• The court will hold a hearing to approve the agreement if you don't have a lawyer.
• You can cancel the reaffirmation agreement within 60 days after filing it with the court.

Vehicle Redemption in Chapter 7: Pay Fair Market Value to Keep Your 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. (11 U.S.C. § 722.) For instance, suppose your car is worth $7,000, but your loan balance is $12,000. You could redeem your car by paying the lender $7,000 and discharging the remaining $5,000.

Redemption requires a motion before the bankruptcy court. If granted, you'll need to pay the redemption amount in full in one lump sum. If you don't have the money for a lump sum payment, redemption financing is available. The loans carry higher interest rates because they're higher risk. Still, the savings from reducing the principal balance can still make redemption worthwhile.

Example. If you owe $15,000 on a car worth $8,000, redemption saves you $7,000 in principal. Even with a higher interest rate on the redemption loan, your monthly payment will likely be lower because you're financing $8,000 instead of $15,000.

Surrendering Your Vehicle: When Chapter 7 Makes Sense

If neither reaffirmation nor redemption works for you, you can surrender the vehicle back to the lender. This option makes sense if:

• The car is worth less than you owe.
• The payments are unaffordable.
• You don't need the vehicle.
• The car needs expensive repairs.

When you surrender, the lender will sell the car at auction, and any deficiency balance will be discharged in your bankruptcy.

Chapter 13 as an Alternative: How It Stops Repossession

If the options above don't work for you, but you still want to keep your car, consider Chapter 13 bankruptcy. Filing Chapter 13 before the sale can force the lender to return your vehicle and allow you to pay off the loan through your repayment plan over three to five years. (11 U.S.C. § 1322.)

If you've owned the car for at least 910 days—about two and a half years—you might even be able to reduce your principal balance or interest rate by "cramming down" your car loan. (11 U.S.C. § 506(a).) This allows you to pay only the fair market value of the car through your Chapter 13 plan, treating the remainder as unsecured debt.

Chapter 7 vs. Chapter 13: Timeline, Costs, and Outcomes

Choosing between Chapter 7 and Chapter 13 depends on your specific situation and financial goals. Here's how they compare:

When Chapter 7 Bankruptcy Is Right for Your Repossessed Car

• You can afford the lump sum redemption payment (either from savings or redemption financing).
• You're willing to reaffirm the loan and can stay current on the modified payments.

• You don't need the car and want to eliminate the debt by surrendering it.
• You need quick debt relief.
• You're current on your car payments and need to eliminate other debts.
• The lender repossessed your vehicle recently, and the automatic stay can stop the sale.

When Chapter 13 Bankruptcy Is Better for Saving Your Car

• You're significantly behind on payments and need time to catch up over three to five years.
• You want to force the lender to return a recently repossessed car.
• Your car qualifies for a cramdown because you've owned it for more than 910 days.
• You're underwater on the loan and want to reduce the principal balance over time rather than through lump-sum redemption.
• You have other secured debts, like a mortgage, that you're behind on and also want to save the house through a repayment plan.
• Your income is too high to qualify for Chapter 7.
• You want to keep the car but can't afford redemption financing or reaffirmation at the current terms.

Timeline and Cost Comparison

• Chapter 7. You'll typically receive a discharge in three to five months. Attorney fees are generally between $1,000-$2,500, plus $338 filing fee and about $75 for required education courses.
• Chapter 13. You'll typically receive a discharge after three to five years. Attorney fees are generally between $3,000 and $5,000, plus a $313 filing fee, $75 for required education courses, and a monthly fee paid to the trustee for payment facilitation.

Credit Impact

Both types of bankruptcy affect your credit, but in different ways. Chapter 7 remains on your credit report for 10 years from the filing date, while Chapter 13 remains for 7 years. However, Chapter 13 may have less initial impact because it shows you're repaying creditors rather than fully defaulting.

Understanding Deficiency Balances After Car Repossession

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."

How the Lender Calculates Deficiency Balances

Suppose you owe $18,000 on your car loan and the lender sells your repossessed vehicle at auction for $11,000. You would owe a deficiency balance before additional costs. The additional costs, which can include repossession costs, storage fees, auction and selling expenses, and late fees and interest, can add up quickly.

Example. Suppose you owed $18,000 when the lender repossessed the car, and it brought $11,000 at auction. If repossession and selling costs were $1,500, you'd owe an $8,500 total deficiency ($7,000 auction deficiency, plus $1,500 in repossession and selling costs = $8,500). These amounts can be even higher, especially if the vehicle was stored for weeks before sale at $25 to $75 per day.

Chapter 7 and Deficiency Balances

Chapter 7 bankruptcy will "discharge" or wipe out the entire automobile loan or a deficiency balance liability. (11 U.S.C. § 727.) The lender can't collect or sue you to recover this amount.

What If the Lender Already Sold My Car?

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, which is valuable given that deficiency balances can range from thousands to tens of thousands of dollars, as demonstrated above.

The court will discharge the deficiency balance along with other qualifying debts, like credit cards, medical bills, and personal loans.

Motor Vehicle Exemption Requirement: Protecting Your Equity in Bankruptcy

Even if you can get your car back from the lender, you must be able to protect any equity in Chapter 7 bankruptcy by using exemptions. Bankruptcy exemptions protect certain property from the bankruptcy trustee. (11 U.S.C. § 522.) Here's how they work.

Each state provides a "motor vehicle" exemption that protects a specific dollar amount of equity in your car. Some states also allow you to use a "wildcard" exemption to cover equity that exceeds the motor vehicle exemption amount. (Some states give you the option of using the federal exemptions instead of the state exemptions.)

If you can fully protect your equity using the exemption, the trustee can't sell your vehicle. Your equity equals the car's fair market value minus any outstanding loan balance.

Example. Suppose your vehicle is worth $10,000 and you owe $7,000. Your equity is $3,000. If your state's motor vehicle exemption is $5,000, your car would be fully protected.

FAQs: Car Loans and Bankruptcy

Here you'll find some commonly asked questions about liens in bankruptcy.

Can I buy a car during my Chapter 7 bankruptcy case?

Yes, but you'll need permission from the Chapter 7 bankruptcy trustee and the court. Most trustees will allow you to purchase a vehicle if you need it for work or family necessities, especially if you're surrendering your current car. You'll likely need to finance through a subprime lender at higher interest rates during an active bankruptcy case.

How long does a car repossession stay on my credit report?

A repossession remains on your credit report for seven years from the date of the first missed payment that led to the repossession. The Chapter 7 bankruptcy filing itself stays on your credit report for 10 years. However, the negative impact diminishes over time, and many people see credit score improvements within 12 to 24 months after bankruptcy discharge if they rebuild credit responsibly.

What if I can't afford redemption or reaffirmation payments?

If you can't afford either option but need a vehicle, consider surrendering your current car and using your postbankruptcy fresh start to purchase a more affordable vehicle. Many dealerships work with recent bankruptcy filers, and while interest rates will be higher, you might get approved for a loan on a less expensive vehicle with more manageable payments.

Will my credit score improve after a Chapter 7 bankruptcy?

Yes, in many cases. Suppose missed payments, collections, and the repossession itself have already damaged your credit. In that case, Chapter 7 bankruptcy can actually start your credit recovery. However, expect to see a drop first. Credit scores usually rise from steadily after discharge if you use secured credit cards responsibly and make timely payments on new credit.

Can the lender repossess my car after I file for bankruptcy?

Not without court permission while the automatic stay is in place. However, if you don't file your Statement of Intention on time or if the court grants the lender's motion to lift the automatic stay, repossession can proceed.

Should I get legal help after car repossession?

A local bankruptcy lawyer can explain your rights and the options available to you, including filing for bankruptcy. Consultation is important because repossession laws, exemption amounts, and bankruptcy procedures vary significantly by state.

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'll find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. 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.