Car Repossession and Chapter 13 Bankruptcy

When you file for Chapter 13 bankruptcy, it's common to wonder if your car is safe from repossession. Or if you recently lost it to repossession, whether Chapter 13 bankruptcy can help you get it back. Read on for the answers.

(For more information about what happens to your car and car loan in Chapter 13 bankruptcy, see Your Car in Chapter 13 Bankruptcy.)

The Automatic Stay Stops Car Repossession

When you file for Chapter 13 bankruptcy, the court puts an order called the "automatic stay" in place that prohibits debt collection attempts. The stay applies to most, but not all, creditors and debt types.

For instance, the stay will stop collections for credit card debt and other loans, as well as a foreclosure sale. It will also prevent a lender from repossessing your car.

However, the stay won't stop criminal actions, child custody, or visitation proceedings, and, depending on your state law, certain eviction proceedings. (Learn more in How Bankruptcy Stops Your Creditors: The Automatic Stay.)

Chapter 13 Bankruptcy Helps You Keep Your Car

Here's how the automatic stay protects you in two different repossession situations.

You Still Have the Car When You File for Bankruptcy

If the lender hasn't repossessed your car when you file for bankruptcy, the automatic stay will prevent the lender from repossessing it until the bankruptcy judge approves your Chapter 13 repayment plan. If your repayment plan repays any missed car loan payments (the arrearage), the lender can't repossess your car during your bankruptcy or after it concludes (assuming you stay current on your payments).

Even so, you must make "adequate protection" payments from the time you file for bankruptcy until your plan is approved. These payments cover the depreciation of your car during this period. Usually, adequate protection payments are equal to the amount of your car payment. So you should plan to keep making your car payments until the court confirms your plan.

When the Stay Might Not Protect You

The stay lifts by operation of law (which is another way to say "automatically") and will go away if you:

• file a Chapter 13 bankruptcy shortly after the court dismisses a previously-filed Chapter 13 case (the stay will last for 30 days only unless you file and win a motion requesting additional time), or
• reject a personal property lease, such as for a car or equipment (the automatic stay will lift on the rejection date).

Also, a creditor can ask the court to "lift" or remove the automatic stay to continue collection proceedings during a bankruptcy case. A lender who can show that it stands to lose money—for instance, you stop making your car payments during your case—will have a good chance of winning such a motion.

The Lender Repossessed the Car Before You Filed for Bankruptcy

In some cases, if the lender repossesses your car shortly before you file for Chapter 13 bankruptcy, you might be able to get the car back. In your repayment plan, you'll need to provide for the payment of the arrearage and be able to continue making your monthly payments. If your car has been repossessed and you plan to file for Chapter 13 bankruptcy, contact an attorney immediately. (To learn more, see My lender repossessed my car right before bankruptcy. Can I get it back?)

Other Chapter 13 Benefits: Reducing a Car Payment

If you're worried about your car getting repossessed, it's likely that you can't afford the payment. If you owe more than what the vehicle is worth, Chapter 13 bankruptcy can help.

You can reduce the loan balance on the car (or boat, storage building, furniture, jewelry, vacation home, and similar property) to the value of the property if the loan meets certain conditions (more below). You can also lower a high-interest rate to a more affordable amount. Any remaining amount gets treated as unsecured and will only get paid if you have room in your budget.

The ability to alter loan terms is called a cramdown, and it's available for just about any type of loan secured by the property except for the mortgage on your principal home or a recently purchased item (more limitations below).

Example. Jean owes $10,000 on a Prius she bought three years ago, but it's only worth $8,000. In Chapter 13 bankruptcy, a cramdown will allow Jean to reduce the amount she must pay for the car loan to $8,000.

The bankruptcy code also allows you to reduce a high-interest rate. The creditor is entitled to receive the prime interest rate plus 1 or 2 points. (Most courts accept the prime rate published by the Wall Street Journal.) For instance, if the current rate is 4%, most bankruptcy courts would approve a cramdown to around 6% (this will change as rates rise).

Limitations on Car Cramdowns

The cramdown option isn't limitless. It doesn't apply to new car loans (and other types of property), and it doesn't survive a Chapter 13 case that is dismissed rather than discharged.

• No cramdown for a recent property purchase. Cramdown isn't available on a loan used to buy a vehicle during the 910 days before filing the bankruptcy case. You can cramdown car title loans that weren't used to purchase the vehicle even if that title loan was taken out within the 910 days (for instance, you used the car as collateral for another financed purchase).
• No cramdown in a dismissed Chapter 13 case. You'll get the benefit of the reduced balance and interest rate only if you complete your Chapter 13 plan. If the case gets dismissed, the loan will revert to its original terms and the creditor will have the right to collect the total amount owed at the higher interest rate.