Understanding the Automatic Stay in Bankruptcy

Whether you are considering filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy, the automatic stay can provide temporary protection from a repossession. But which chapter in bankruptcy you file depends ultimately on your intention with your car loan. Either way, the automatic stay serves as a powerful tool to stop lawsuits, collection actions, and foreclosure.

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Updated on December 17, 2024.

Key Points:

• The automatic stay is in Section 362 of the U.S. Bankruptcy Code.
• The automatic stay temporarily stops most civil lawsuits.
• A Chapter 7 bankruptcy filing does not protect your car if you are behind on payments.
• A bankruptcy petition can be amended to add or remove creditors.
• A bankruptcy case can be converted from Chapter 7 to Chapter 13 or vice-versa.

The Automatic Stay and Car Loans

Today’s question comes from Mandy and her husband, Rick, regarding their car. Unfortunately, due to a job loss, they fell behind on the payments for their car loan. So, they proceeded to file for bankruptcy. The problem is that they will lose their car automatically upon filing for bankruptcy. Why, if the automatic stay should prevent that? Because they filed for Chapter 7 bankruptcy versus Chapter 13.

How the Automatic Stay Works and Affects Bankruptcy and Civil Lawsuits

The automatic stay is referenced in Section 362 of the Bankruptcy Code. The automatic stay kicks in “automatically” upon filing for bankruptcy. No motion has to be filed or special permission requested from the bankruptcy judge to start the automatic stay.

The automatic stay is a powerful tool in the arsenal of bankruptcy because it stops creditors from moving forward in most lawsuits. However, the automatic stay does not apply to certain types of cases, such as criminal cases and cases in family court regarding child support and alimony.

With their car at risk of being repossessed and the fact that Chapter 7 bankruptcy was filed, the creditor responded by filing a motion seeking relief from stay. That means that the creditor is asking the court to set aside or modify the automatic stay so that the creditor can seek to repossess the car.

• Car Loans and Bankruptcy: How to Keep Your Car

So creditors can try to proceed with their civil lawsuit after filing their motion for relief of stay and scheduling a hearing before the bankruptcy judge. In this case, the creditor filed their motion because by filing for Chapter 7 bankruptcy, Mandy and Rick can’t keep their car. That legal option does not exist.

Unfortunately, because they filed for Chapter 7 without a lawyer, they didn’t realize that the automatic stay would not protect them while they attempted to reinstate their car loan. In addition, because bankruptcy was filed, the creditor would not be able to receive any payments while the Chapter 7 bankruptcy remains pending.

What Can They Do to Protect Their Car

At this point, the only options are to dismiss the case and be on the same page with the creditor to accept a payment to bring the loan current. A refinance of the car loan is also possible, and depending on various factors, maybe a personal loan to catch up with the late payments.

However, Mandy and Rick also hope they can get the funds from family members to do so. If not, chapter 13 is the only way to save their car.

Remember, if an asset is secured by a loan such as a car loan or a house with a mortgage, if the debtor wants to keep that asset and is behind on the payments, Chapter 13 is the only option. Under no circumstances will Chapter 7 protect you from the creditor taking back the asset if you are behind on payments. Only Chapter 13 bankruptcy can do that.

So What Can Mandy and Rick Do Now That Chapter 7 Bankruptcy Has Been Filed?

Mandy and Rick’s car has no equity, so the trustee will abandon their interest in it. The trustee is not interested in the vehicle. That works to their advantage. Here’s how.

Reaffirmation Agreements: Keeping Your Car Post-Bankruptcy

Mandy and Rick can file a motion with the bankruptcy court asking to convert their Chapter 7 bankruptcy to Chapter 13. If granted by the bankruptcy judge, this will allow them time to bring the late payments current on their car loan over the next 36 to 60 months.

Debtors routinely convert from Chapter 7 to Chapter 13 or vice versa, depending on the facts of the case. So, while initially, their case started on the wrong track, they can file a motion with the court seeking to convert from Chapter 7 to Chapter 13 bankruptcy to save their vehicle.

If you have a question about your car loan, feel free to send me an e-mail at alex@bankruptcy.blog.

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Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.