Repossession and bankruptcy are ugly words for car owners. Both indicate that your finances are no longer under your personal control. While declaring bankruptcy is a remedy of last resort, it can provide substantial relief – and under some circumstances, help avert repossession of your car. While the simple act of retaining a bankruptcy attorney won't foil the repo man, once you actually file the bankruptcy case, the repossession cannot occur. The bankruptcy filing stays all collections and gives you time to come up with a plan.
What is Bankruptcy?
Individuals can file different types of bankruptcy depending upon their financial situations; these are filed under the different chapters of the Bankruptcy Code. People generally avail themselves of Chapter 7 or Chapter 13.
Under Chapter 7, the debtor's non-exempt assets are liquidated to pay off creditors. With a few exceptions, such as child support, student loans and certain types of taxes, any debt that remains is discharged, and the person who filed is no longer obligated to repay.
Under Chapter 13, the debtor's financial obligations are restructured so that she may pay them over a reasonable period of time. All forms of bankruptcy will remain on the debtor's credit for a number of years.
The Automatic Stay in Bankruptcy
Regardless of whether you file Chapter 7 or Chapter 13, the filing of the petition immediately stays any actions to collect against you. This is called the "automatic stay," and it is one of the main reasons people file bankruptcy. Unless you've filed multiple cases within the past year, the automatic stay prevents creditors from taking action to collect what you owe them. The repo man cannot take your car after you file bankruptcy unless he has filed documents with the bankruptcy court asking for an order lifting the stay.
However, even with the stay in place, you'll have to come up with a way to pay for the car; otherwise, when the stay lifts, the vehicle is fair game.
Paying for the Car in Chapter 13 Bankruptcy
If you can continue making payments on your car, you may stand a reasonable chance of preventing repossession by filing Chapter 13. If you can continue making car payments, Chapter 13 allows you to work out a payment plan to pay off the car loan. Sometimes, you can even devise a plan whereby you pay the lender the depreciated value of the car, instead of the amount due. Such plans are called "cram downs," because you're "cramming down" the lender's loan to the value of the car. For example, if you have a car worth $5,000 and you owe $7,000, you can cram it down and pay the lender $5,000 with interest. If you succeed and get a discharge, you'll have clear title at the end of the case. This is only available, however, if you didn't buy your car within 910 days prior to the bankruptcy filing. You'll also need to make adequate protection payments during the first part of the case before your plan is approved.
Chapter 7 Bankruptcy
Chapter 7 also allows you to keep you car under certain circumstances. Since the car loan is secured debt, the bankruptcy court will not use your car to pay off your other debts. This leaves you with several options that can help you keep your car. You can reaffirm your old car loan and continue to make payments. This reaffirmation effectively acts as a new contract.
In some instances, particularly if you have always stayed current with your car payments, you can continue paying, as you did before.
Alternatively, you can purchase the car from the lender at its current value, which is called redemption. Unlike the cram down, which allows you to negotiate new payments and is not available in Chapter 7, to redeem, you must pay for the car with a lump sum. If none of these options are feasible, the lender can repossess your vehicle.
- Edmunds.com: Stay One Step ahead of the Repo Man
- Bankrate: My Lender Refuses to Repossess my Car
- The Law Dictionary: Timeline to Repossess a Car after Bankruptcy
- Cornell University Law School: Bankruptcy -- An Overview
- Legal Information Institute: 11 USC § 362 - Automatic stay
- Diamond Law: Adequate Protection, The Undersecured Creditor
- Benson Law: What is the 910-Day Cramdown Rule?
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