Bankruptcy prevents a vehicle repossession. And then what?
Vehicle Creditors Are Impatient
Vehicle loan creditors can be very aggressive about repossessing their collateral—your crucial means of transportation. They tend to be impatient because this kind of collateral is so mobile and easy to hide. Plus experience likely tells creditors that the longer they wait the less likely they’ll be able to find the vehicle and in decent condition.
So, most vehicle loan contracts give the creditors the right to repossess as soon as you’re in default on your agreement, which means as soon as you miss a single monthly payment. They don’t tend to repo cars that fast, usually letting you get 30 or maybe 60 or even more days late, depending on factors such as your payment history, whether and what you’re communicating with them, and the value and condition of the vehicle.
The “Automatic Stay” Stops the Repo
If you are concerned about your own situation, you may feel better that one of the most powerful tools of bankruptcy—the “automatic stay”—can prevent a repossession. That’s the law that automatically goes into effect the moment your bankruptcy case is filed at court to stay—or stop—all collection activity against you or your property, including the repossession of collateral.
After the Repo is Stopped
But assuming you file a bankruptcy and stop a repo before it happens, what happens next? The two different consumer bankruptcy options each help in different ways. The rest of today’s blog post is about how Chapter 7 helps in this situation. The next one will be how Chapter 13 does so.
Chapter 7 “Straight Bankruptcy”
When filing a Chapter 7 case you need to decide whether you want to and can afford to keep the vehicle, or instead will surrender it.
If you want to keep your car or truck you will likely need to catch up on any late payments very quickly–within a month or two after your Chapter 7 is filed. The vast majority of vehicle loan creditors will only give you that much time.
There’s some important timing involved. To keep the vehicle in a Chapter 7 case, you will almost always be required to sign a “reaffirmation agreement,” a document filed at the bankruptcy court. That agreement formally excludes the vehicle loan from the discharge of your debts—to keep your vehicle you have to agree to pay what you owe on it. Bankruptcy law requires the reaffirmation agreement to be filed at court before your debts are discharged. The court order discharging your debts is entered most of the time about three months after your case is filed. So your creditor wants you to be current on your loan before that reaffirmation agreement is prepared and filed at court.
If you don’t anticipate being able to bring the vehicle loan current that quickly—either with the Chapter 7 filing gaining you enough additional cash flow or from some other source—but you still need to keep the vehicle, Chapter 13 may be a better solution, as we’ll discuss in the next blog post.
Assuming for the moment that Chapter 13 is not a viable option, and that you can’t pay the back payment(s) in time, you need to consider surrendering the vehicle. There are certain advantages to surrender—especially in the midst of your Chapter 7 case—that you should fully understand even if at first it doesn’t sound like a good idea.
Surrendering the vehicle:
- gets you out of the monthly payments
- avoids having to catch up on the accrued late payments and other fees
- discharges (permanently writes off) any “deficiency balance,” the amount that you would owe if you had surrendered the vehicle without bankruptcy
Please visit again next week to see how Chapter 13 can help you keep your vehicle.