Avoid Car Repossession: Bankruptcy Options Explained
If you have fallen behind on your auto loan payments, while you might consider filing Chapter 7 bankruptcy, note that Chapter 7 is often referred to as “liquidation bankruptcy,” so it’s not an option if you wish to keep your car. However, Chapter 13 bankruptcy can prevent a car repossession. In this blog post, I’ll discuss your options.
Updated March 5, 2025.
Key Points:
- A car repossession doesn’t mean you aren’t liable to the lender for the pending balance.
- Chapter 7 bankruptcy can help wipe out the debt on the car loan.
- Chapter 13 bankruptcy can help you keep your car.
With a car repossession, it is possible that the lender could still sue you. Keep reading to understand how a deficiency judgment works and your options.
Auto Loans
Auto loans are secured debt, unlike credit cards, medical bills, personal loans, and student loans.
The creditor can take back the vehicle since the auto loan is secured and tied to the car. It is similar to a mortgage loan, but the difference is that lenders must go through the foreclosure process to take back the house.
The Car Repossession Process
Depending on your state, once you fall behind on your car payments, the lender may not be required to get a court order to repossess your car.
While there is no specific date, the lender may start to take action after thirty days. After ninety days, you are guaranteed the auto loan lender is looking to repossess your car.
Negotiating with the Lender Before the Car Repossession
If you need to catch up on payments, you can try negotiating with the lender with a forbearance or deferment. This became common during the coronavirus pandemic when creditors realized they had to be more flexible regarding debt collection actions.
With a forbearance due to financial hardship, the lender will pause payments temporarily, including interest from accruing. With a deferment, while payments are paused, interest continues to accrue. Which one you qualify for depends on your specific situation and the creditor’s policies.
Note that the amount put on hold is paid back. For example, if the lender agreed to a temporary pause of three months and you had three years left on the car loan, now it would be three years and three months. However, either option could be what you need to get you through these difficult financial times.
Auto Loan Reinstatement
There’s also the option of reinstating the auto loan. This means that the past due payments, including late fees, are paid. If the car was repossessed, those costs would also be included.
This could be an option if you can get a personal loan to bring the car payment current.
Taking Back the Car
When the lender seeks to repossess a vehicle, they seek to have it towed by a company, aka “the repo man.” At this stage, it’s anyone’s guess when that will happen, but it could be anywhere at any time. Whether you are out at a restaurant, at work, or your car is at home. Of course, no laws can be broken when the repo man comes after your vehicle.
For example, they can’t go into your garage or a gated property to get back the vehicle.
What Happens After the Car is Repossessed
After repossessing your car, the loan company will sell the car at a public auction. Generally, the vehicle will sell for less than what is owed. For example, you owe $25,000 on your vehicle, but the car sells for $15,000 at auction. When that happens, that is known as a deficiency, and the balance may be owed depending on your state.
In addition to the difference in the loan balance, there could be other fees, such as towing fees and other costs incurred by the auto lender.
Voluntary Repossession
You can negotiate with the auto lender about a voluntary repossession. This could save you money since there aren’t additional towing fees, etc., but you would still be responsible for any deficiency balance. However, working out a payment plan with the lender is possible.
Debt Collection Lawsuits and Bankruptcy
Since there’s a balance pending on the original loan, the creditor has the right to file a lawsuit against you. Since the car was already repossessed, the debt is unsecured.
Once the creditor or debt collection agency wins the lawsuit, they get a deficiency judgment. This allows the debt collector to try to collect on the debt, whether by wage garnishment, a levy on your bank account, or liens on other property, such as another car or home.
The car repossession will appear on your credit report and negatively impact you. This could make getting another car loan more difficult, and the interest rate will likely be higher.
How Bankruptcy Affects Car Repossession
Once bankruptcy is filed, the automatic stay will prevent the lender from proceeding with the car repo or debt collection lawsuit. However, which chapter in bankruptcy is filed will affect the outcome.
With Chapter 7 bankruptcy, the automatic stay would be temporary, as Chapter 7 does not allow you to catch up on secured debt payments.
With Chapter 13 bankruptcy, you could save your car as that option is used to catch up on secured debt payments. To oversimplify, say you are $5,000 behind on your car loan. Those $5,000 would be spread out over the bankruptcy plan, which is three to five years.
However, while the bankruptcy plan is to catch up on arrears, the regular monthly payments continue.
I hope this helps explain your options if you are facing a car repossession or if the creditor has already taken your vehicle. If facing this situation, consult a local bankruptcy attorney to determine your best options.
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Please note the information on this site does not constitute legal advice and should be considered for informational purposes only.
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