A lot of debtors who file Chapter 7 bankruptcy are behind on their rent or mortgage. They’re 30, 60, or 90 days late on their credit cards. Their utilities are close to being shut off by the utility companies, and their vehicles are an inch away from being repossessed.
As debtors learn more about Chapter 7, they discover that credit card debt, medical bills, utility bills, certain taxes, and personal loans can be completely wiped out through the bankruptcy discharge. So, that gets them wondering, “Can bankruptcy save my car?”
Can the Automatic Stay Protect Your Car?
Once a debtor files for bankruptcy relief, the “automatic stay” goes into effect until the bankruptcy discharge, prohibiting creditors from continuing or starting any debt collection activity against a debtor and this includes auto repossessions. However, lenders can petition the bankruptcy court to lift the automatic stay so they can repossess your vehicles.
If a lender files a “motion for relief from the automatic stay” because you’re in default on an auto loan, you have about two weeks to oppose the lender’s motion. If you decide to oppose the lender, the court will schedule a hearing about 30 days from when the lender’s motion was filed and served.
Suppose the lender was right about your default and you were properly served, the judge can continue the hearing to give you the opportunity to try and reach an agreement with your lender. However, it is not uncommon for a bankruptcy judge to lift an automatic stay so a lender can repossess a vehicle in which the debtor is in default on the loan.
If you want to keep your car, you have two options:
- Catch up on your payments
- Negotiate with your lender to cure the default and keep your vehicle.
Lenders are motivated to work with debtors to save their vehicles from repossession. Why? Because, if the loan is discharged in bankruptcy, the lender will get the car back, but since the loan is discharged in the Chapter 7, the lender can lose a lot of money. Usually, a loan with interest is worth more than what they’d get for the vehicle at auction.
For lenders, it’s usually favorable to negotiate a lower interest rate, lower payments, or even a lower principle balance over letting a loan be discharged through bankruptcy. If you do however renegotiate the terms of the auto loan, you will be reaffirming the debt, so it cannot be included in your bankruptcy discharge.