So long as your car hasn’t already been auctioned or sold, filing bankruptcy can help stop repossession. If you file Chapter 7, the automatic stay gives you time to negotiate new, more affordable loan terms with your car lender. It can also get rid of a deficiency judgment if your car is repossessed and sold. Filling Chapter 13 can help you reorganize your auto loan debt to get a more affordable monthly payment and spread out past-due payments over several years.
Written by Attorney Paige Hooper.
Updated April 6, 2022
If your car is in danger of being repossessed, filing bankruptcy will stop the repossession from happening. If your car has already been repossessed, bankruptcy can help you get it back if you file before your car is sold. Of course, bankruptcy is only a temporary fix — not a pass for a free car.
Depending on the type of case you file, bankruptcy can help make your car payments more affordable or help you avoid paying for a car you no longer have. This article covers how different kinds of bankruptcy can help you stop the repossession process and explains your options for getting your car back without filing bankruptcy.
Can You Get Your Car Back After a Vehicle Repossession?
When you borrow money to buy a car, you sign a contract that gives the car lender a security interest in the car. The car is the collateral that secures the loan. If you don’t make the loan payments as agreed in your contract, the lender can take the collateral from you. Taking the collateral back is called repossession.
After your lender repossesses your car, they usually sell the car, typically at an auction. The time frame for this sale depends on state law. Some states require lenders to wait at least 10 days after repossession. But in other states, a sale can happen sooner. You do have some options for getting your car back after it’s been repossessed, but they’re only available before the lender sells your car. In other words, to get your repossessed car back, you must act quickly.
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Using Reinstatement or Redemption To Save Your Car
If your car has been repossessed, you may be able to get it back if you can reinstate your loan or redeem the car. Your lender must send you a notice after the repossession that tells you:
What your options are,
How and when you can redeem or reinstate, and
The auction date (or, for a private sale, the redemption deadline).
Reinstating Your Loan
To reinstate your loan, you must bring the loan current. This means paying all missed or past-due payments, late fees, and interest, plus any charges associated with the repossession. Towing costs, storage charges, and legal fees are some examples of repossession expenses.
Not all auto loans can be reinstated. You only have a right to reinstate your loan if your contract contains a reinstatement clause or if your state’s laws require your lender to allow reinstatement. There may also be limits on how often or how many times you can exercise your reinstatement rights. In California, for example, you can only reinstate your loan once every 12 months, and no more than twice for the same loan.
Redeeming Your Car
To redeem your car, you must pay the entire loan amount — not just the past-due portion — along with any interest, late fees, and repo expenses. Most states allow you to redeem your car after repossession. Some states require you to redeem by a certain deadline, while other states allow you to redeem at any time before the lender sells the car. In some states, you can lose your right of redemption if you commit certain actions, such as using false information in your auto loan paperwork.
Filing Bankruptcy To Save Your Car
Not many people who face repossession have access to the lump sum of money needed for reinstatement or redemption. For most people, filing bankruptcy is the only feasible way to stop the repossession process. When you file bankruptcy, the Bankruptcy Code’s automatic stay stops your creditors from pursuing any further collection activities against you or your property (including your car).
The automatic stay will stop your lender from repossessing your car. If your car was repossessed before you filed bankruptcy, the automatic stay can stop your lender from selling the car at auction. But you must file your bankruptcy case before your lender sells your car. This can happen very quickly depending on your state’s laws — sometimes within 10 days or less after the repossession. Bankruptcy can’t help you get your repossessed vehicle back after it’s been sold.
Most people who file bankruptcy file under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Your options to keep and pay for your car depend on which kind of bankruptcy you file. Neither type of bankruptcy will allow you to keep a car that you can’t afford. If you want to keep your car, you must pay for it — although you may not have to pay as much as you would without bankruptcy.
Chapter 13 Bankruptcy
At the heart of every Chapter 13 bankruptcy is a repayment plan that lasts from three to five years. Through your Chapter 13 plan, you’ll pay either the full principal balance on the loan or the value of the car, whichever is lower, at a reduced interest rate. Your monthly payments are stretched out over the entire plan term.
Keep in mind, though, that filing Chapter 13 can potentially affect all your debts, not just your car loan. Also, for the bankruptcy court to confirm your Chapter 13 plan, your paperwork must show that you can afford your plan payments. To successfully complete a Chapter 13 case, you’ll likely need to hire a bankruptcy attorney.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy doesn’t require a repayment plan, so you usually have to be current on your vehicle loan if you want to keep your car in a Chapter 7 case. That said, there are still some benefits to filing Chapter 7 if you face a car repossession.
Avoiding a Deficiency Balance
Ordinarily, after your lender repossesses your car, they’ll sell it, usually at a public auto auction. The buyer is typically a car dealer who plans to resell the car. So, the price your lender gets for your car is usually on the low side — around half of its market value, depending on your state’s laws.
After the auction, your lender uses the sale proceeds to first pay off any auction costs and repo-related expenses. Then, they apply the remaining sale money to your loan balance, which includes principal, interest, late fees, and other charges. If there isn’t enough money to cover the full amount, you still owe the difference. This remaining debt is called a deficiency balance. Your lender can attempt to collect it from you just like any other debt. If you don’t pay, your lender can sue you and get a deficiency judgment.
A deficiency balance is an unsecured debt. Because the lender already repossessed the car, there’s no longer any collateral securing the loan. Chapter 7 bankruptcy eliminates most unsecured debt, including deficiency balances. When it comes to repossession, the primary benefit of Chapter 7 is that you can use the bankruptcy discharge to wipe out a deficiency balance, so you’re not stuck paying for a car you don’t have.
Reaffirming a Loan in Chapter 7
In some situations, you may be able to work with your lender to modify or refinance your car loan. Not every lender will be willing to negotiate, though, and bankruptcy law doesn’t require creditors to negotiate in Chapter 7 cases. If you can work out a deal with your lender, they’ll likely require you to sign a reaffirmation agreement containing new or modified loan terms.
In a reaffirmation agreement, you agree to abide by the original contract terms, subject to any changes you and the lender negotiated. Since you sign the reaffirmation agreement after the date you filed bankruptcy, the bankruptcy doesn’t apply to the new contract. In other words, if you don’t make the payments under the reaffirmation agreement, the lender can repossess your car, and you’ll be responsible for paying any deficiency balance.
Even if your car has been repossessed, you may be able to get it back. If you can make a lump-sum payment, you may be able to redeem your car or reinstate your loan. Otherwise, you can file bankruptcy to get your car back. A Chapter 13 bankruptcy lets you pay for your car through a more affordable repayment plan. In a Chapter 7 bankruptcy, you can try to negotiate new loan terms with your creditor. If this doesn’t work out, Chapter 7 will still help you avoid getting stuck with a deficiency balance.
Whichever option you choose, you must act quickly. Depending on your state’s laws, your lender can sell your car within days after the repossession. Once the car is sold, you aren’t likely to get it back.