Repossession After Bankruptcy: What You Should Know

Filing for Chapter 7 bankruptcy can erase your personal liability to pay back your car loan, but it can’t erase the lien your creditor has against the vehicle. The way to prevent car repossession after Chapter 7 discharge is to stay current on your monthly payments.

You can keep your car and continue making the payments by entering into a reaffirmation agreement with your car lender during your bankruptcy case. It’s up to the bankruptcy court to approve a reaffirmation agreement or up to your attorney, if you have one, to sign off on it. Otherwise, the reaffirmation agreement isn’t valid and your personal liability on the car loan will be discharged. Even if the court denies your reaffirmation agreement, most lenders will only repossess your vehicle if you fall behind on payments. 

Chapter 7 Bankruptcy and Secured Debt

A secured debt is connected to specific property, which is put up as collateral to secure the loan. Common secured debts are mortgages backed by real estate and car loans secured by the motor vehicle. An unsecured debt is not connected to any specific piece of property, such as credit card debts and medical bills. Whether a debt is dischargeable in bankruptcy, meaning it can be erased, depends on the type of debt it is and whether there’s a reaffirmation agreement.

Chapter 7 bankruptcy discharges the filer’s personal obligation to pay the secured debt, but it doesn’t erase the lien against the property itself. Even if there’s no personal liability to pay back a car loan, the vehicle itself is still securing the loan. Generally, the only way to remove a lien against property is to pay the lien off. If you want to keep your car that has a secured debt attached to it, you must keep up with your monthly payments and pay the car lender back after bankruptcy.

Chapter 7 Bankruptcy and Car Loans

It’s common to be concerned about what’s going to happen to your car if you file bankruptcy. Car loans are considered secured debts. If you’re still making car loan payments, you have three options for how to handle your car loan in a Chapter 7 bankruptcy case:

• Reaffirmation

• Redemption

• Surrender

A reaffirmation agreement brings back to life personal liability on a debt that would have otherwise been discharged at the end of a successful bankruptcy case. The U.S. Bankruptcy Code requires secured debts for personal property, including car notes, to be reaffirmed. Reaffirming your car loan means that you will be personally liable to pay back the debt after bankruptcy. If you fail to make your monthly car loan payments, the car lender will repossess your vehicle.

After a car repossession, the lender will typically sell the motor vehicle at auction. A deficiency balance occurs when the amount received at auction is less than the amount owed on the loan balance. If you signed a reaffirmation agreement that was accepted by the bankruptcy court, then you’re on the hook for any deficiency balance.

Redemption in bankruptcy allows you to pay the lender the fair market value of the car in a lump sum, rather than paying the amount you owe. Redeeming your car makes sense if your car is worth significantly less than the amount you owe on the car loan. The lump sum payment necessary for redemption can come from a private loan from a friend or family member or from a redemption loan through companies like 722redemtion.com. If you take out a loan to fund the redemption, that loan is post-petition debt and the bankruptcy itself will have no bearing on it. You’re liable to pay back debts incurred after the date you file bankruptcy. 

Surrendering your car is the third option for how to handle your car loan in a Chapter 7 bankruptcy. If you surrender your car, your creditor will repossess the vehicle and the car loan balance and any deficiency balance will be erased as part of your bankruptcy discharge. 

You may want to consider having only one car in your household if you currently have two, or consider buying another less expensive car. After bankruptcy, your credit score won’t be perfect, but there are lenders who will finance new cars (or new-to-you, used cars) for people fresh out of bankruptcy. Just be mindful of debts you incur after bankruptcy because they have to be paid back. 

Repossession Is Proper After Discharge

Debts discharged in bankruptcy are gone forever and don’t ever have to be paid back. It’s illegal for creditors to attempt collection on discharged debts. But creditors are allowed to repossess property backing a secured debt after discharge. Repossession of collateral is different than trying to collect from you personally.    

Car repossession is proper after a Chapter 7 discharge because the lien on the car is not erased by the bankruptcy. If you default on your monthly car payment after bankruptcy, your lender has the right to repossess your vehicle. State law governs the repossession process. 

After you file for bankruptcy protection, the automatic stay takes effect, which stops all collection activities, wage garnishment, repossessions, eviction, foreclosure actions, and harassing collection phone calls. If you choose to surrender your vehicle in bankruptcy, sometimes creditors will file a motion for relief from the automatic stay to repossess your car sooner, some wait for the automatic stay to expire 45 days after the initial meeting of creditors if no reaffirmation agreement is signed before then, and some wait to repossess the vehicle until the bankruptcy discharge is entered. Once your discharge is entered, the automatic stay is terminated because it’s no longer needed. 

What Does This Mean for You?

As mentioned, a repossession is not the same thing as a creditor attempting to collect the loan balance from you. Whether you’re at risk of being sued depends on what happened during your bankruptcy case.

You Entered Into a Reaffirmation Agreement for the Car Loan and It Was Approved...

If you signed a reaffirmation agreement and it was approved during your bankruptcy case, then you are personally liable on the car loan. A bankruptcy discharge will have no bearing on a reaffirmed car loan. If you later default on your monthly payments, the lender has the right to repossess the vehicle and come after you for any deficiency balance. 

The lender will be able to take collection action against you for the deficiency balance, which can include sending bills, collection phone calls, and filing a lawsuit against you for unpaid debts. If their lawsuit is successful and they get a judgment against you, they can then garnish your wages. 

You Didn't Enter Into a Reaffirmation Agreement or the Court Didn't Approve the Reaffirmation Agreement...

If you signed a reaffirmation agreement but it was not approved by the bankruptcy court or signed by your bankruptcy attorney, then you are not personally liable on the car loan. Personal liability is discharged if there’s no reaffirmation agreement – even if you signed the document, if the court didn’t approve it and your attorney didn’t sign it, then your personal liability to pay back pre-petition debt (from before filing) is discharged. The lender will not be able to collect any deficiency balance from you. 

Most people consider having the bankruptcy court deny the reaffirmation a good thing as lenders typically only repossess a vehicle if the filer stops making payments, even if the reaffirmation is not approved. 

Let's Summarize...

You have options for what to do with a car loan when filing a Chapter 7 case, including reaffirmation, redemption, or surrender. Entering into a reaffirmation agreement can lead to new debt problems if you default on your car loan payments after bankruptcy. 

The purpose of filing Chapter 7 bankruptcy is to put you in a better financial situation than before filing and give you a fresh start. Reaffirming a car loan is risky because of the limits on how often you can file for bankruptcy protection. If your car loan has a monthly payment you can’t afford, a hefty interest rate, or is underwater, meaning you owe more than it’s worth, consider the alternatives to attempting reaffirmation. It’s not a bad idea to get a free evaluation with a bankruptcy lawyer about all of this if you're unsure how to handle your car loan in bankruptcy. 

Upsolve’s free web app can help eligible individuals file a Chapter 7 bankruptcy without a lawyer or connect you to a lawyer if you prefer that option.