How to Protect Your Car When Declaring Bankruptcy

Falling behind in a car loan is stressful enough. It doesn’t need to be made worse when filing for bankruptcy. If you are worried about protecting your car from repossession when filing for Chapter 7 or Chapter 13 bankruptcy, there are a few solutions that work. 

How Car Repossession Works

Lenders can repossess vehicles if you default on loan payments. This does not require a prior notice – but, it also cannot happen through violence or forced retrieval. Lenders will then send the debtor a notice that details when the deadline is before a vehicle is sold. Prior to this deadline, debits have the right to redeem the vehicle by paying the outstanding loan balance. Otherwise, the car can go up for auction.

Despite this, there are ways to protect your vehicle. If you default on a loan, filing for bankruptcy can help instill a court order known as an automatic stay. During this time, creditors and lenders cannot continue collecting or attempt to collect debts until the bankruptcy filing is completed. This gives time for debtors to make further plans to protect their assets.

What Happens After Repossession?

After repossession, you have the right to redeem, or pay the full balance plus reasonable expenses, any time before the car is sold to reclaim the vehicle. Whether you can reinstate (catch up on debts without paying the full balance) depends on your contract. It is not guaranteed by law.

Car Protection Through Bankruptcy

An automatic stay stops most collection actions temporarily. This includes a scheduled car repossession or auction of a car that has already been repossessed, but not yet sold. If the car is still in the creditor or lender’s protection, you may need to seek turnover through the court to offer adequate protection. A creditor’s retention after filing technically does not violate an automatic stay. So, additional legal action matters.

Chapter 7 vs. Chapter 13 for Your Car

If the car has little non-exempt equity, you can often keep it by continuing payments after filing Chapter 7. Debtors can also sign a reaffirmation agreement to keep their car and continue on with their contract. If the car is too expensive, an alternative would be to surrender the car, which wipes personal liability on the car loan once a discharge is received.

In Chapter 13 bankruptcy, debtors can catch up on missed payments over 3-5 years while maintaining ongoing payments, stopping repossession and sale. Courts often allow a reduced interest rate and a longer repayment term on the secured portion of the loan through Chapter 13 plan confirmation. Or, if someone is co-signed to the car, Chapter 13 can add a co-debtor stay to protect the car from repossession while you pay off your debt.

State and Federal Exemptions

Different states offer different exemptions when it comes to bankruptcy. There are also federal exemptions that debtors can use when filing. In some states, there is an option whether to use the state or federal exemptions, which each offer different benefits to filers.

Pennsylvania lets filers choose between state and federal exemptions. Many choose the federal exemptions due to the motor vehicle exemption that can be stacked to protect more equity. The Pennsylvania exemptions do not include specific car exemptions, though it can still protect motor vehicles as property.

Always consult with a bankruptcy attorney to explore your options for car protection during a challenging financial time. Whether you are filing Chapter 7 or Chapter 13, there are options to protect your car and your other assets from repossession.