If you are behind on your car payments, your vehicle may be in danger of repossession. Filing for Chapter 7 bankruptcy can only temporarily prevent car repossession, giving you more time to negotiate or cure your default.
Just because you've filed for bankruptcy doesn't mean you're in the clear yet. So, what happens to car repossession after Chapter 7 discharge? What can you do to stop repossession?
An "Automatic Stay" Will Only Temporarily Prevent Repossession
Once you file for Chapter 7 bankruptcy, the presiding judge will issue a court ordered "automatic stay". This order immediately prohibits creditors from collecting on debt. In order to repossess your car under Chapter 7 bankruptcy, your creditor must get court approval first. However, it is vital to remember that an automatic stay typically only lasts for a few months. Once your case is closed, the stay goes away your car is left open to repossession.
Lenders Can Ask the Court for Permission to Repossess During Chapter 7
Another thing to keep in mind is that lenders can still repossess your car during Chapter 7 bankruptcy, if they get court permission first. Your lender can go before the court and file a motion to lift the automatic stay. Unfortunately, if you fail to demonstrate that you're attempting to payoff your debt, then most judges will grant your lender's request to repossess.
Chapter 7 bankruptcy can only temporarily relieve your car from repossession. If you do not work with your lender to come up with ways to payoff your debt, then your car will eventually get repossessed anyway. However, what Chapter 7 can do is to provide you with enough time to prepare counters against car repossession after Chapter 7 discharges.
What Are Your Options for Stopping Car Repossession?
Below are some ways you can save your car from repossession.
Negotiating New Loan Terms
Under Chapter 7 bankruptcy, an automatic stay gives you more time to negotiate with your lender. If you willingly work alongside your lender, you can more than likely figure out a solution to keep your car and prevent repossession.
While bankruptcy discharge wipes out personal liability on a loan, your lender still has a lien over you. Typically, repossession is the only remedy a lender holds after bankruptcy. However, lenders are more often than not willing to negotiate new loan terms. This is especially true if a car is worth less than the balance on the loan. Lenders want to regain the entire balance of your loan plus interest.
Furthermore, you may even be able to negotiate a reduced balance or lower interest rate. However, doing so means you must reaffirm your debt, making yourself personally liable on the loan again.
Curing the Default
Sometimes, under an automatic stay, allows you to bring your loan current or cure your default outright with your lender. If you can afford to do this, then your lender will have no reason to repossess your car. This is because your lender will make more money if you continue payments on your loan.
Wiping Out the Lien and Redeeming Your Car
Another option under Chapter 7 bankruptcy is to wipe out your lender's lien and redeem your car (basically buying your car back at fair market value). Redeeming your car can save you a ton of money if it's worth much less than the overall balance on your loan. However, this option is only available if you can afford to pay a lump sum to your lender. In order to redeem your car, you must first file a motion and obtain court approval.
Here's an example of how you can save money by redeeming your car. Say you owe $10,000 on your loan balance, but your car is only worth $6,000. You then redeem your car by paying your lender the $6,000 in one big lump sum. After that, you own your car free and clear for less than the balance on the entire loan.