If You Are Behind in Your Car Payments, Can Chapter 7 Help?

Learn what happens to your car when you file for bankruptcy, whether bankruptcy can stop a repossession, and when you must surrender your vehicle in Chapter 7.

By , Attorney · University of the Pacific McGeorge School of Law

Filing for Chapter 7 bankruptcy will eliminate your responsibility to pay the car loan. But there are no free rides. If you want to keep the car and avoid repossession, you must make arrangements to pay for it before filing for Chapter 7 because Chapter 7 won't help you pay a car loan.

Although Chapter 7 bankruptcy doesn't provide a way to catch up on overdue car payments like Chapter 13, Chapter 7 bankruptcy can stop the repossession temporarily, which might give you time to make other arrangements. This article explains what Chapter 7 bankruptcy can do to stop repossession and what happens if the lender doesn't repossess your car after Chapter 7

Chapter 7 Will Temporarily Stop a Repossession

If you are behind on your car payments and file for Chapter 7 bankruptcy, your lender cannot immediately repossess your vehicle. When you file for bankruptcy, the automatic stay goes into effect. It prevents almost all of your creditors from continuing with any collection actions, including repossessions or home foreclosures.

How to Ensure You Stop a Repossession After Filing Chapter 7

After you file for Chapter 7, the court sends your creditors—including the vehicle lender—notice of your bankruptcy. However, it can take up to a week for the lender to receive the notice. If you anticipate repossession, you or your attorney should immediately notify your lender that the automatic stay is in place to stop collection actions.

When Can a Lender Repossess a Vehicle During Chapter 7 Bankruptcy?

The automatic stay is not absolute. You must state in your bankruptcy paperwork that you intend to keep the car. If you fail to file the Statement of Intention form on time and don't execute your stated intention when required, the automatic stay terminates early. Because the timing is case-determined, you'll want to verify deadlines with your bankruptcy lawyer. (11 U.S.C. § 521.)

Also, your car lender can ask the bankruptcy court to "lift" or remove the stay. The bankruptcy court will grant the request if you are behind in your car payments and don't have enough equity in the car to protect the lender from loss. The equity must cover any missed payments, late fees, and costs owed when the bankruptcy is over.

What to Do to Keep a Car in Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy alone won't help prevent an eventual car repossession if you don't make arrangements to pay. The Chapter 7 bankruptcy discharge will wipe out your car loan but not the lien that allows the lender to take the car if you don't pay.

Because Chapter 7 doesn't have a mechanism for repaying overdue car payments, you'd likely lose your car to the lien. In that situation, you'd want to explore Chapter 13. It's more helpful when you're behind on a car loan.

Steps for Keeping Your Car Financed Car in Chapter 7 Bankruptcy

To keep your car in Chapter 7, you must meet two criteria: You must be able to protect the equity in your car from the Chapter 7 trustee, and you must pay the lender as agreed. Here are the questions you should answer affirmatively before filing for Chapter 7.

Can You Protect Your Vehicle Equity?

If you want to keep the car, you must first determine whether you have equity in it and, if so, if you can protect or "exempt" the equity in bankruptcy. If you can't, the Chapter 7 bankruptcy trustee appointed to your case will sell the car for the benefit of your creditors.

You'll want to examine your state's exemption statutes and see whether the exemption amount will cover the equity. Most states allow you to protect property needed to maintain a household and job, including some equity in a vehicle. Check for a motor vehicle exemption. You might also be able to use a wildcard exemption.

Are You Behind on Your Car Loan?

You'll also need to be current on your car payments. Otherwise, the lender can ask the bankruptcy judge to lift the stay and allow the lender to use the lien rights to repossess the car, as discussed above. Most bankruptcy lawyers ask clients to be up-to-date on payments before filing because when the loan is current, protecting the car in Chapter 7 is more feasible.

Other Car Options in Chapter 7

Keeping a car in Chapter 7 bankruptcy isn't easy when you're behind on the payments, and isn't always possible. Here are a few other options to consider:

  • Give the car back to the lender. If you don't want to keep your vehicle or realize the payment is too much, you can surrender it to the lender. If you surrender your car during your Chapter 7 bankruptcy, you won't owe anything if the lender can't sell it for what it's worth, called a "deficiency balance."
  • Buy a cheaper car later. If you can wipe out enough other debts, you might free up enough money to buy a more reasonable vehicle after your bankruptcy.
  • Negotiate and reaffirm a new payment plan. Just because you can't make up car loan arrears in Chapter 7 doesn't mean you can't try to get your lender to agree to accept some form of payment plan. The lender might agree to a more reasonable payment as part of a reaffirmation agreement. You should know, however, that it's unusual for lenders to agree to reduce the amount owed. Also, if you reaffirm your car loan in bankruptcy, you're creating a new contract, and you'll be on the hook for the loan if you can't keep up with the payments.

Redeem the Car and Pay Less Than What You Owe

Another option not used much is redemption. It allows the filer to pay the lender the replacement value of the property and works well when the property is worth less than the debtor owes. However, restrictions exist:

  • the debt must be a consumer debt (taken out for personal, not business expenses)
  • the property can't be real estate (a car is personal property)
  • the property must be tangible (not intangible property, such as stock or publishing rights)
  • the filer must be able to exempt all of the equity in the property, and
  • the filer must pay the lender must in one lump sum payment.

Although this can be an excellent way to go, most bankruptcy filers don't have sufficient cash to cover the replacement value of the property. However, some lenders will make redemption loans. If you're interested, talk with a local bankruptcy attorney.

Learn more by reading Redeeming Secured Property in Chapter 7 Bankruptcy.

What If My Car Is Never Repossessed After Chapter 7?

The lender is responsible for arranging to pick up your vehicle. If the lender doesn't retrieve it, it will remain your property. This situation most commonly arises when cars are damaged in an accident, need mechanical repairs, or are worth little otherwise. Talk with your bankruptcy attorney about how long you must wait before selling or transferring the car.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure 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!

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Helpful Bankruptcy Sites

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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.

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