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Car Loans, Repossessions, and Bankruptcy

Are you behind on your car payments? Are you afraid your lender is going to take your vehicle in a repossession? Are your finances causing significant stress?

If you are struggling financially and you own a car or truck, there is a good chance you are falling behind on your vehicle payments and you are worried about your lender repossessing your vehicle.

Losing your vehicle would mean you’d also lose your transportation to work, which could cause even more financial hardship.

There is hope and bankruptcy might be a suitable option to grant you an opportunity to keep your vehicle and get your finances back on track.

Chapter 7 Bankruptcy and Repossession

If you are falling behind on your car payments (and want to keep the car), filing for Chapter 7 can provide temporary relief, however in most cases, it will not provide a permanent solution.

Chapter 7 bankruptcy can provide an automatic stay, which temporarily prohibits creditors from repossessing your car or truck. This delay could provide an opportunity for you to catch up on payments or negotiate a solution with your lender.

This delay typically only lasts for a month or so, and once your bankruptcy case has progressed past 30 days or is closed, repossession would highly likely still occur. Due to this, Chapter 13 might be a better solution.

Chapter 13 Bankruptcy and Repossession

Chapter 13 allows for a more long-term solution to help you get back on your feet and keep your car or truck from being repossessed. In Chapter 13 bankruptcy you have an automatic stay similar to Chapter 7, however, in Chapter 13 you establish an extended payment plan with your creditors that is designed to pay off your debts and get you back to financial health.

Under the Chapter 13 bankruptcy reorganization process, you can modify your existing debt payments (like a car payment) by reorganizing eligible debt into a new three to five-year repayment plan. This affordable repayment plan protects assets, while still allowing you to reduce and eliminate debt.

Chapter 13 bankruptcy is not right for everyone. You need to have a steady source of income that can be used to calculate a monthly payment that would be reasonable for you.

Let Us Help

Our experienced bankruptcy lawyers can help you determine whether Chapter 7 or Chapter 13 is a good option for protecting your car or truck from repossession. We’ll give you honest, experienced advice that will help you create a strong financial plan to help meet your short and long-term goals.

Contact us to speak to one of our experienced bankruptcy lawyers or to arrange a free initial consultation. If you cannot come to our Omaha offices, we can consult with you by telephone.

Vehicle Loans and Bankruptcy FAQs

It depends on your situation. If your finances are really out of control and bankruptcy is the only practical option, then bankruptcy isn’t worse than a repossession.

Repossession vs Bankruptcy

A repossession is normally a sign of a much bigger problem which is too much debt and not enough income. If your only problem was the inability to afford a vehicle and you really don’t have other significant financial problems, then naturally it would be better to avoid bankruptcy.

Perhaps a bankruptcy filing would be considered more harmful to your credit, but in the long term, if bankruptcy is necessary to get a fresh start, and things just won’t get better otherwise, then bankruptcy certainly wouldn’t be worse than repossession.

Once a bankruptcy is filed, a decision needs to be made on whether to keep the vehicle or surrender it back to the creditor. If you want to keep the vehicle and file a Chapter 7, car payments must ultimately be made and it is better not to get behind or to get caught up quickly. If Chapter 13 is filed, then in Nebraska and Iowa, your car loan gets recalculated into a monthly payment paid to the Trustee. Therefore, in Chapter 13, you would stop making your car payment.

Obviously, if you are going to give the vehicle back, then it doesn’t make sense to continue on with the monthly payments but do keep it insured until the transfer is made.

In many cases, a car can be purchased or refinanced during bankruptcy. Each situation is unique and it depends on what chapter of bankruptcy you file. It is quite common for people in Chapter 13 to buy a new vehicle during the three to five year duration of the plan. In Chapter 7 bankruptcy cases, it is possible to find a new lender but that is not common.

Caution: If you buy a car before filing bankruptcy, you must be very careful to make sure that you can pay back the lender, in full, and comply with all of the loan requirements.  Yes, it is possible, but should be done only with careful consideration and of utmost concern for the car lender (to make sure they receive the benefit of the deal) when bankruptcy is possibly going to occur in the future.

In short, yes, it is possible but consult with your bankruptcy attorney first, if possible.

Theoretically, you could purchase a vehicle immediately after filing Chapter 7.  Is that practical or possible?

In the real world, people do buy cars soon after they file bankruptcy, but the purchase price of the car is a big factor.  Do you need financing?  If yes, then you’ll likely have to wait until the Chapter 7 case is closed and then find a lender willing to work with you. It is possible and it does happen.

If you are going to pay cash (somebody will help you buy it or you have exempt assets, like an IRA, available), then it still is possible, but you should run it by your bankruptcy attorney to make sure things are done properly.

A Chapter 13 bankruptcy could very well lower your car payment. It’s not possible in every case, but it does happen quite frequently.  Certain rules apply and your bankruptcy attorney can provide the specific details.

Theoretically, you could buy a car promptly after filing Chapter 13 if you are not financing it and are using funds from another party or from exempt assets.  But, you should absolutely talk to your attorney about the right way to do this.  If you are needing to finance a vehicle, then a Motion to Incur debt needs to be filed with the Court for permission to do so.  It could happen quickly (3-4 weeks) and if a valid, logical, and necessary reason exists to do so, most courts will permit the purchase to occur.

Caution: This is a danger zone.

It is possible to keep your car if you convert from Chapter 13 to Chapter 7, but you must make sure that when the conversion occurs that you can get current with the payments per the contract with the lender within 30 days or less in most situations.  Frequently, the original loan is re-calculated in Chapter 13 and that payment structure doesn’t match the original contract.  The creditor has the right to have payments be brought current or they could ultimately repossess the car.  Sometimes the creditor will offer a new deal (via a reaffirmation agreement) but that is the exception and not the rule.

Not really from a credit standpoint. Normally, a voluntary surrender is considered the same as a repossession.  However, that doesn’t mean that you shouldn’t do a voluntary surrender if you can’t afford the asset.

Voluntary surrenders of vehicles, etc. is normally the right thing to do if you simply cannot afford to keep the asset.  However, if possible, you should discuss what to do with a bankruptcy attorney before making any decisions.

Making the wrong decision could adversely affect your qualifications for Chapter 7 or Chapter 13 or otherwise harm your interests.