Bankruptcy’s effect on a delinquent car loan depends on several factors: what bankruptcy proceeding you file under -- Chapter 7 or Chapter 13; when you file; and whether you have access to cash so you might be able to save your car. It’s not out of the question that you can keep the vehicle or have it returned to you after repossession, but you may need the help of a lawyer and a sympathetic court.
The Automatic Stay
Bankruptcy law is designed to prevent repossession. As soon as you file your petition, an automatic stay goes into effect. This prohibits creditors from contacting you, taking collection actions against you and repossessing your vehicle if you’re behind on payments. If you file for Chapter 13, this involves entering into a court-monitored plan to repay your debts over time, so you can include your past due car payments in your repayment plan and keep your car. But if you file for Chapter 7, it’s not this easy.
Relief From the Stay
Chapter 7 is the form of bankruptcy where the trustee takes control of your non-exempt property and sells it to raise money to pay your creditors. If you file for Chapter 7, your auto lender can ask the court for special permission to repossess your car regardless of the automatic stay. The lender can file a motion with the court for relief from the stay in a process known as an adversary proceeding. If you’re in default on your car loan and if you have no way of catching up with the payments, the judge will typically lift the stay and allow the lender to move ahead with repossessing your car. But if you can negotiate a solution with the lender to make up the payments you missed, you may be able to keep the vehicle if the court approves the payment plan.
Redemption of the Vehicle
You can redeem your vehicle in Chapter 7 bankruptcy but this involves having access to cash. You’ll need the approval of the court so you'll have to file a motion in your bankruptcy proceeding asking for the judge’s OK. If the court grants your request, you can pay the lender the car’s fair market value, which may be less than the outstanding loan against it. If so, you own the car free and clear even though the balance of your loan is left unpaid.
Return of a Repossessed Vehicle
If your car is repossessed just before you file for Chapter 7, you can ask the court to order the lender to return it to you if you can make up your past due payments. You’ll probably also have to reimburse the lender for any costs it incurred in repossessing the car. But you won’t have much time to do this because the lender will typically resell your car within a short time of taking it back. You might also be able to get the car back if it’s repossessed shortly before you file for Chapter 13 protection. The court will often grant your request if you include the past due payments in your Chapter 13 plan, but you’d still have to act fast.
A Reaffirmation Agreement
Your lender really doesn’t want to take your car back because it will have to go to a lot of effort and expense to resell it to a third party, and the vehicle may not sell for enough money to cover your outstanding loan. If you can negotiate a remedy for your past due payments, your lender may let you keep the car but you’ll have to sign an agreement to reaffirm the loan -- you can’t discharge the loan in bankruptcy and keep the car as well. Reaffirmation takes your auto loan out of the bankruptcy proceedings, but you’ll still owe the amount of the loan, and the lender can repossess later if you fall behind with payments again when your bankruptcy is over.