People who cannot afford to pay their car loans are usually unable to stop car repossession — add this to other debts and the financial situation can become very bleak. Some people begin exploring their bankruptcy options in hopes that this will help them erase the debt associated with vehicle repossession.
When they take a car loan or lease, people sign an agreement. This written document typically contains a provision for the creditor to retain the title to the vehicle and take the car back if the borrower defaults on the agreement. Repossession is the most common method used to take cars back and the creditor can come onto the property and take the car without filing a lawsuit or even providing advance notice. With the vehicle in possession, the creditor may decide to keep or sell it through a private sale or public auction. If the car sells for less than the balance of its secured loan or lease, the creditor may sue the loan-holder for the difference, which is called a deficiency. To avoid a deficiency balance, the borrower may request a contract reinstatement prior to repossession and sell the vehicle him or herself for a higher price.
Exploring Your Bankruptcy Options
Even if reinstatement is used, a deficiency balance may still exist and many states do not prohibit collection of small balances. When this debt is unaffordable, last-resort options like bankruptcy should be explored — different types of bankruptcy work differently regarding car loans. Chapter 7 bankruptcy is designed to wipe out debts including a car loan balance that remains after the vehicle is repossessed, whereas Chapter 13 bankruptcy will protect an individual from collection of a deficiency balance and includes car loan arrears in a three to five-year repayment plan, giving the borrower more time to repay this money. Regardless of which bankruptcy is filed, current loan payments should be paid as they come due.
Within approximately four to six months of filing a Chapter 7 petition, the debtor should receive a discharge. At this point, the individual is no longer required to pay any of the discharged debts. Chapter 13 is a debt repayment bankruptcy that is not discharged until three to five years after the repayment plan started. However, you may be able to save your car by reducing your car loan.
During bankruptcy, an automatic stay is issued that halts collection efforts and deficiency judgment lawsuits by creditors. It will even temporarily stop wage garnishments or bank attachments arising from deficiency judgments. Once the bankruptcy is discharged, the debtor will be freed from many debts including a deficiency balance from car repossession.
If Your Vehicle Has Been Repossessed
Filing for bankruptcy is also one way to get a car back after it has been repossessed, but time is of the essence and the individual should file for bankruptcy before the lender has sold the car. Once the bankruptcy is filed, an automatic stay feature requires the lender to get court permission to sell the car, which allows the borrower to gather the money needed to get the vehicle back or to get current with payments through a formal repayment plan.
A bankruptcy attorney assists car owners with the Chapter 7 and Chapter 13 filing processes and knows how to stop car repossession before the process begins. The easiest way to avoid repossession is to contact the lender as soon as it becomes difficult to make loan payments. The lender may offer to temporarily reduce the loan interest rate or installment payment amount so it will be easier to catch up on payments.
A reaffirmation agreement is an option for those who file Chapter 7 bankruptcy — allowing them to keep their cars while remaining liable for the debt outside of the bankruptcy. An individual who signs a reaffirmation agreement and subsequently has the Chapter 7 bankruptcy discharged remains bound by the agreement. This means that the individual must continue making car loan payments even though other debts have been discharged through the bankruptcy. A bankruptcy lawyer can help a Chapter 7 bankruptcy filer prove that the car is a necessary expense and that loan payments will not be undue hardships.
Many people wait until debt has passed the point of no return before they take action. If you were unable to save your car and it was repossessed, there is now an additional credit blemish along with a hefty debt. Fortunately, there may be a way to get rid of this debt through bankruptcy but this will require hard work and diligence. When your vehicle is repossessed, the lien holder probably isn’t done messing with you. They are still going to want the remaining balance owed that is the difference between what you owed and what they sell it for. In many cases, they will file a civil lawsuit for collection of this debt against you. Speaking to a bankruptcy expert for a free bankruptcy consultation will show you that you can erase debt from repossession.
Life After Bankruptcy & Repossession
It is not always wise to try to get a car back after it has been repossessed. If the loan is significantly higher than the value of the vehicle and payments may not be affordable, consulting a bankruptcy attorney to discuss all the alternatives is the best approach. If the smartest decision is to let the car be repossessed, the associated debt will be discharged through Chapter 7 or Chapter 13 bankruptcy.
However, purchasing another car after Chapter 7 or Chapter 13 bankruptcy is possible, but the interest rate for a car loan may be higher than average and the lender may request a larger down payment and proof of income. From the perspective of the lender, an individual who recently emerged from bankruptcy is less of a credit risk than a person who could file for bankruptcy in the near future. This is because they have already filed bankruptcy and have erased their debt, so now they have money to spend.
Moving forward, a bankruptcy lawyer can help a car owner deal with the fallout of vehicle repossession. An attorney can help the individual file for Chapter 13 bankruptcy to repay the debt and file a motion for turnover ordering the lender to return the car. If the individual files for Chapter 7 and the car is repossessed, any balance remaining after the car is sold will be discharged through bankruptcy. It is possible to erase repossession debt with bankruptcy, but only an experienced bankruptcy lawyer can give you the specifics on your personal situation.