Filing for bankruptcy after a car repo can get rid of any remaining debts that you have for your car.
Written by Kristin Turner, Harvard Law Grad.
Updated October 1, 2021
Losing a vehicle because you cannot pay the car loan payments is frustrating. However, should you file for bankruptcy after a repo? Can filing a Chapter 7 get your car back after a repo? Will Chapter 13 save my car from repossession? We explore these questions and others in this article.
What Is a Repossession (repo)?
A repo is short for repossession. Repossession is the legal method used by a creditor to take a vehicle back when a person is not paying their car loan payments. When you borrow money to purchase a vehicle or borrow money against your vehicle, the lender has a lien on the car title. A lien is a legal document that allows the lender to repossess the vehicle when you do not make payments. In some states, the lender can do this after one missed payment. After the lender repossesses the vehicle, it can sell the vehicle.
The money from the sale of the vehicle is used to pay off the loan. If any money is left over after the sale, the lender should return the money to the owner. However, that is usually not the case.
Can Bankruptcy Help After a Repo?
Deficiency Judgments: I Still Owe Money After a Repo.
Most vehicles are sold for less than is owed on the car loan. A deficiency is the amount of money owed on the account after the car is sold. In other words, the car was sold for less money than the amount that was owed and the borrower is still on the hook for what remains. The creditor may file a lawsuit to collect the deficiency.
If you do not respond to the lawsuit, the judge signs a deficiency judgment. The deficiency judgment is another unsecured debt that you owe. The creditor can take several steps to collect a deficiency judgment. Some states allow a judgment creditor to garnish wages. Wage garnishment occurs when a creditor is allowed to receive a portion of your paycheck each pay period until the debt is paid in full.
Filing Chapter 13 After a Repossession
A Chapter 13 repayment plan can help you get your car back and keep your car after a repo. However, there are a few things to keep in mind:
You only have 10-days to act. you must be very quick because you only have ten days to file the Chapter 13 bankruptcy forms to stop the lender from selling the car. Once the car is sold, filing a Chapter 13 case does not get the car back.
You have to pay the past due amount. In a Chapter 13 repayment plan, you pay the past due car payments to the creditor. In most cases, you pay the entire loan through the bankruptcy repayment plan. You may be able to lower your car payments and the interest rate on the car loan by filing a Chapter 13 case.
However, what happens if you cannot afford to pay a Chapter 13 plan payment? Does Chapter 7 get your car back?
Filing Chapter 7 After a Repossession
When you file a Chapter 7 case, you do not file a repayment plan. Debtors in Chapter 7 are not required to repay any portion of their debts, except for debts that cannot be discharged (alimony, student loans, child support, etc.). A bankruptcy discharge gets rid of the legal responsibility to repay a debt.
However, if you have a secured debt, you must be up-to-date on your payments and stay up-to-date if you want to keep the property you used to secure the loan.
Above we discussed a lien on a vehicle. A lien is a secured debt, and the company that is owed the money is a secured creditor. Secured creditors have the right to take property if a person does not pay the loan payments. Therefore, if you do not pay your car payments, the lender will repo your car.
Can Chapter 7 Help Before a Repossession?
A Chapter 7 bankruptcy case can stop a repossession or stop the creditor from selling the car at auction. However, the Chapter 7 case only stops the repo temporarily. You must negotiate with the lender to work something out, or you can redeem the vehicle.
A lender may refinance the loan or work with you to catch up the payments, but the company is not required to work with you. Working with the lender may be costly because it may add late fees, charge a higher interest rate, and add the repo fees to the amount you owe. You need to be very careful when reaffirming or refinancing the debt.
Keeping Your Car During Bankruptcy: Reaffirm or Redeem
Reaffirming a Car Loan in Chapter 7
Reaffirming a debt may be an option to keep your car after filing a Chapter 7 case. A reaffirmation agreement states that you agree to pay the creditor the amount you owe under the terms of the original loan or terms you negotiate with the creditor. The creditor lets you keep the vehicle in exchange for signing the reaffirmation agreement and paying the loan payments.
The disadvantage of a reaffirmation agreement is that you are personally responsible for the debt even after your bankruptcy case is closed. You cannot walk away from the loan even you cannot pay the payments. The creditor can sue you for a deficiency and take all action to collect the money, including wage garnishments if your state allows judgment creditors to garnish wages.
If you had trouble making the car payments before filing Chapter 7, you might want to let the car go instead of risking a deficiency judgment that your Chapter 7 case will not discharge.
Redeeming a Car in Chapter 7
Another option some debtors have in Chapter 7 is to redeem the car. If your vehicle is worth less than the loan amount, you might be able to pay the lender an amount equal to the value of the car. Instead of paying the full loan balance, you only need to pay the lender the value of the car to keep the car.
However, you must pay the amount in one lump sum. For most people, it is nearly impossible to come up with that much money for one single payment.
How Can Chapter 7 Help?
Filing Chapter 7 will not only bring debt relief, it can also be a relatively quick process that will ensure creditors stop their collection activities against you. Contrary to popular belief, your credit score can improve after a bankrupcy filing if you take proactive steps to rebuild your credit.
It Only Takes 3-6 Months
A Chapter 7 bankruptcy can help you get rid of debt in four to six months. Most debtors keep all their property and get rid of most, or all, of their unsecured debts. By getting out of debt, you can begin rebuilding your financial well-being by saving money for emergencies and retirement.
Your Credit Score Will Improve
A Chapter 7 bankruptcy case wipes away old debts. For many debtors, filing a Chapter 7 case can help them improve their credit score much faster than ignoring the debts. A good credit rating can help you go back to school, live in an area you choose, and get the job you want. Our credit scores affect many areas of lives. Therefore, you want to take care of old debts now instead of later.
It Stops Creditor Harassment/Collection Calls
A Chapter 7 case stops creditor harassment. It is stressful dealing with creditors. The endless telephone calls, threatening letters, and lawsuits can harm your health. When creditors call you at work, your performance at work may suffer. In some cases, creditor calls at work could get you into trouble with your boss. Chapter 7 stops all collection actions.
You Can Start Rebuilding
Even if you let your car go, a Chapter 7 bankruptcy case prevents deficiency judgments and removes the rest of your debts. You can get a fresh start so that you can begin saving for a new car. Also, getting rid of your old debt can help you qualify for a new car loan when you are ready and able to handle a loan.
Do I Qualify for Chapter 7?
Chapter 7 has an income requirement. If you want to know if you can file Chapter 7, click here to use Upsolve's free bankruptcy screening tool. Upsolve has resources that help people who qualify file on their own without an attorney.
We understand that many people do not have the money to hire a bankruptcy lawyer. We created a system that helps low-income individuals file Chapter 7 without a bankruptcy attorney. You can get the information you need to help you:
Decide if Chapter 7 is right for you.
Prepare your bankruptcy forms.
Finish your credit counseling course.
File your bankruptcy forms with the bankruptcy court.
Prepare for the First Meeting of Creditors.
Finish the debtor education course.
Prepare for life after bankruptcy.
Filing a Chapter 7 bankruptcy case can give you the fresh start you need to recover after a financial crisis. People file Chapter 7 for many reasons. Unemployment, medical bills, credit card debt, injuries, and divorce are just some of the reasons why a person may need to file for bankruptcy relief.
Ignoring Debt Is Not the Answer — You Can Get a Fresh Start!
It is stressful and frustrating when you do not have enough money to pay your debts. However, ignoring the debt problem is not the answer. Your debt problem will continue to grow and get worse if you do not do something to take care of it now. If you do not think you can afford to file bankruptcy, think again. You can do this! We can help!
Upsolve is a non-profit company. Our goal is to help people who cannot afford to pay a bankruptcy attorney to get the debt relief they need. We believe everyone should have the same chance to get out of debt with Chapter 7, regardless of their current financial situation.
Contact Upsolve now for more information about filing Chapter 7. You could be debt-free in about six months after you file your bankruptcy petition.