Filing bankruptcy immediately stops the repossession of a vehicle by its creditor. Then you can use Chapter 7 or 13 to hang onto it permanently.

We’re continuing a series of blog posts on the smart timing of your bankruptcy case. This week we get into filing bankruptcy to stop a vehicle repossession or surrender. Bankruptcy gives you several tools to save a vehicle that you really want to keep. But bankruptcy can also buy just a few more weeks with a truck or car that you can’t pay for. That way you can surrender it when you’re better prepared to do so.

What’s most important is that you can’t take advantage of these benefits if you surrender your vehicle, or it gets repossessed, before you file bankruptcy. Then it’s too late.

What to Do?

If you currently can’t afford your vehicle payments, you may feel that you have no choice. You figure you just have to give up the car or truck.

You may be currently behind on your payments, worried about an inevitable repossession. You’re wondering whether it makes more sense to just surrender the vehicle yourself. That way you feel you at least have some control of the timing. Or maybe instead you’ll be able to hang onto it a little longer if you wait until it gets repossessed.

Bankruptcy can give you better options then these. First, it can often allow you to keep the vehicle. And second, if it still makes sense to let go of it, you get more control over the timing.

Vehicle Surrender or Repossession Seldom Solves Anything

Surrendering your vehicle, or letting it get repossessed, is seldom a good idea. Both can really hurt, immediately and long-term.

In both of these situations, you would very likely continue owing money on the vehicle loan. Your creditor would sell your vehicle and credit the sale proceeds to your loan balance. But then you’d owe the rest of the balance. That balance would be due in full right away. And almost always the amount you’d still owe would be much more than you expect.

There are a bunch of reasons for that. First, the vehicle would likely be sold for less than it is worth. It would likely be sold at an auto auction, where the purchase prices tend to be low. Second, your creditor would add onto your balance a bunch of costs and fees. Besides late fees, there are various repossession and sale costs, including storage, the auction fee, and such. These charges—which your contract allows—can really add up. Bottom line: you’d likely owe a huge balance, on top of not having your vehicle.

Next, your lender likely won’t waste much time before suing you for that huge balance.  If you don’t respond to the lawsuit, next come wage and bank account garnishments. These would likely force you into bankruptcy. So it makes sense to look at that option before surrendering or losing your vehicle to repossession.

How Chapter 7 Helps

Filing a Chapter 7 “straight bankruptcy” helps in a number of ways.

First, if you’re behind on your vehicle loan payments, filing bankruptcy puts an immediate stop to a pending repossession. The “automatic stay” stops virtually all creditor collections actions, including repossessions. You would then have a month or two, sometimes more, to catch up.

Second, by forever writing off (discharging) all or most of your other debts you’d more easily afford your vehicle payment. Same with your other vehicle costs, like insurance, gas, and maintenance.  

Third, if you decide it’s best to surrender your vehicle, Chapter 7 lets you do so anxiety-free. You don’t have to live in fear about your vehicle disappearing at the worst time. Instead you and your bankruptcy lawyer arrange for a convenient time for you to surrender it. You do so while the automatic stay is protecting you from adverse actions by your lender. Plus it helps to have your bankruptcy lawyer in your corner, instead of being on your own.

Fourth, if you do surrender your car or truck, the remaining balance is forever discharged in bankruptcy. Instead of being on the hook for that balance (as discussed above), you’d owe nothing.

How Chapter 13 Helps

If you really need or want to keep your vehicle, Chapter 7 may not help enough. You may not be able to afford the monthly payment even after discharging other debts. That may be because you owe special debts that Chapter 7 does not discharge, like child support or income taxes. Or you may be behind on payments and be unable to catch up as fast as the lender demands.

Chapter 13 can often cut through all these shortcomings.

First, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.

Second, Chapter 13 can give up to 5 years to catch up on any back payments. Often, you don’t ever need to catch up on them.

And third, if your vehicle loan is more than two and a half years old, you can likely do a “cramdown.” This would lower your monthly payment. It may reduce your interest rate. You’d likely pay less overall on your loan, sometimes by thousands of dollars. Then at the end of the Chapter 13 case you’d own your vehicle free and clear. (See our blog post 2 weeks ago for more about vehicle loan cramdown.)

Conclusion

You can see that it’s usually not smart to surrender a vehicle or allow it to be repossessed. Instead talk with a bankruptcy lawyer to see you could keep that vehicle through either Chapter 7 or 13. Or surrender it but owe nothing on the vehicle loan.