Can Bankruptcy Stop a Car Repossession? A Clear Guide for Borrowers

Falling behind on your car payments is stressful, especially now that repossessions are rising nationwide, with more than 3 million expected in 2026. Borrowers face the issue of whether bankruptcy can help them keep their car, or if surrendered, what happens to the debt. The answer depends on your situation and which chapter of bankruptcy you file.

Updated April 16, 2026.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: Can Bankruptcy Stop a Car Repossession?

• Rising Risks in 2026: Repossessions are surging nationwide, with projections hitting 3 million this year, driven by high interest rates and negative equity.
• The Reality of the Deficiency Balance: Losing the car is often only the beginning of the financial strain. When a repossessed car sells at auction for less than the loan amount, the borrower is still liable for the deficiency balance, plus towing and legal fees. This debt is unsecured and can lead to a deficiency judgment and wage garnishment.
• Chapter 7 Bankruptcy: The Fresh Start: While Chapter 7 triggers an automatic stay that stops repossession, it is a temporary fix if you are behind on payments. Its primary strength is wiping out the deficiency balance if you have already lost the car or choose to surrender it.
• Chapter 13 Bankruptcy: The Best Tool to Keep Your Vehicle:  For borrowers who need to keep their car, Chapter 13 allows the debtor to catch up on missed payments, and the cramdown could reduce the loan balance to the actual current value of the car.

Why Car Repossessions Are Increasing

Car repossessions dropped during the pandemic, but the trend has reversed sharply. According to industry data:

• According to Consumer Affairs, more than 1.2 million vehicles were repossessed in 2022, a significant jump from 2021.
• Subprime delinquencies hit their highest level in over a decade in 2023.
• Analysts expect repossession activity to continue rising through 2026, approximately 3 million, driven by higher interest rates, longer loan terms, and borrowers owing more than their cars are worth. You can read my latest article regarding bankruptcy and 100-month car loans here.

With auto loan balances now exceeding $1.6 trillion according to the Federal Reserve,  many households are stretched thin. If you’re behind on payments, you’re not alone, and you do have options.

How Repossession Works and What Lenders Can Do

Auto loans are secured debt, meaning the car itself is collateral. If you fall behind, the lender has the right to take the vehicle back. Unlike a mortgage foreclosure, many states allow repossession without a court order, which means the process can move quickly.

Most lenders begin serious collection efforts after 60–90 days of missed payments, and by that point, repossession is a real possibility. Your car can be taken from your driveway, workplace, or any public location, as long as they don’t break into a locked garage or gated entrance.

Once the lender takes the car, it’s usually sold at auction. Because auction prices are often low, the sale rarely covers the full loan balance, resulting in a deficiency balance. For example, if you owed $25,000 and the car sells for $15,000, you may still owe the remaining $10,000, plus towing and storage fees.

Professor’s Note: If you get sued on the balance, once the lender obtains a judgment, that is known as a deficiency judgment. By now, the balance owed has increased substantially since court costs and attorney fees are included. Since this is an unsecured debt, it is listed on Schedule F of the bankruptcy petition.

A repossession also stays on your credit report (Equifax, Experian, and TransUnion) for seven years, which generally results in dealerships seeking a larger down payment and higher interest.

Options to Consider Before Repossession Happens

If you’re behind but the car hasn’t been taken yet, you may be able to work out an agreement with the lender. Many borrowers request:

• Forbearance, which pauses payments without adding interest;
• Deferment, which pauses payments but allows interest to continue;
• Loan reinstatement, which brings the loan current by paying past‑due amounts and fees.

These options became more common during the pandemic and may still be available depending on your lender’s policies. Some borrowers also consider voluntary repossession, which avoids towing fees but still leaves you responsible for the deficiency balance.

How Bankruptcy Can Help With Repossession

Bankruptcy immediately triggers the automatic stay, which stops repossession and all collection activity. But what happens next depends on which chapter you file.

Chapter 7 Bankruptcy

Chapter 7 is often called “liquidation bankruptcy,” but here’s what that means in practical terms:

• If the car has not been repossessed yet, Chapter 7 only pauses the process temporarily. You must be current on payments to keep the car long‑term.
• If the car has been repossessed, Chapter 7 can wipe out the deficiency balance, meaning you no longer owe the remaining loan amount.

Chapter 7 is most helpful when you’ve already lost the car or know you can’t afford to keep it.

Chapter 13 Bankruptcy

Chapter 13 is the best option if your goal is to keep your car.

It allows you to:

• Stop repossession immediately and catch up on missed payments over 3–5 years.
• Potentially reduce the loan balance to the car’s value in a process known as the cramdown.
• Keep the car as long as you make plan payments.

For example, if you’re $5,000 behind, Chapter 13 spreads that amount over the length of the plan instead of requiring it all at once. You continue making your regular monthly payment while catching up on the arrears.

When Bankruptcy Makes Sense

Bankruptcy may be worth considering if:

• You’re more than 60–90 days behind, and you wish to keep your car.
• Your lender refuses to negotiate.
• You can’t reinstate the loan.
• You’re facing a deficiency lawsuit, which ultimately leads to wage garnishment.
• You need the car for work, school, or family obligations. In this case, you would file Chapter 13.

Bankruptcy isn’t the right solution for everyone, but it can provide powerful protection when you’re out of options.

The Professor’s Final Thoughts

Car repossession is overwhelming, especially in a year when repossessions are rising, and many borrowers owe more than their vehicles are worth. Whether you want to keep your car or eliminate the remaining debt, bankruptcy can offer meaningful relief. It’s best in these situations to move forward sooner rather than later.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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

Updated initially on March 5, 2025.