The filing of your bankruptcy case immediately stops your vehicle from being repossessed. That’s because a bankruptcy filing triggers one of the most powerful tools of bankruptcy – the automatic stay. That’s the law that goes into effect the instant your bankruptcy case is filed at court, and stays – which means stops – all collection activity against you and all of your property. So your Chapter 7 or Chapter 13 filing will force a creditor to immediately stop a repossession, even if that creditor has already sent out the repo tow truck.
The automatic stay is so powerful that sometimes even if your bankruptcy is filed immediately after the repossession, you may be able to get your vehicle back. The timing is extremely critical, and this works under only certain conditions. But this demonstrates the strength of the automatic stay.
But stopping the repossession is just the beginning for fixing your vehicle loan problem. What happens after that? Chapter 7 and Chapter 13 each gives you different tools for addressing this.
USING “STRAIGHT” CHAPTER 7 TO KEEP OR SURRENDER YOUR VEHICLE
Chapter 7 bankruptcy stops the repossession, and then you quickly have to make a choice: keep the vehicle or surrender it?
To keep the vehicle, most likely you will need to catch up on the late payments within a month or two after your bankruptcy case is filed. Most creditors will not give you more time than that. The reason for this is that if you want to keep the vehicle, you will be required to sign a reaffirmation agreement that reaffirms your legal obligation on the loan. It excludes this debt from the discharge of your debts in your bankruptcy case. This causes a timing crunch. The reaffirmation agreement is legally required to be filed at the bankruptcy court in your case in order for it to be valid. Since your case is closed usually right after the entry of the court order discharging all your debts – which usually happens about three months after your case is filed – your creditor will very likely want you to be current on your loan before that reaffirmation agreement is prepared and filed at court.
If you can’t catch up on your vehicle loan that quickly and yet need to keep the vehicle, one possible solution would be a Chapter 13 case, discussed further below.
If you can’t catch up on your vehicle loan fast enough, and if Chapter 13 is not a viable option, you may well need to surrender the vehicle. Although this may not sound like a good idea, sometimes it’s your only option if you just can’t afford to keep the vehicle. If so, it’s important to understand that probably the best time for the surrender to happen is during your bankruptcy case.
The advantages of surrendering the vehicle include:
- The immediate savings from not having to pay the accrued late payments, late fees and other charges
- The future month-after-month savings from not making the loan payments and insurance premiums, and
- The discharge in your bankruptcy of any deficiency balance, the amount that you would owe after the creditor sold the vehicle and applied the proceeds to the balance of the loan.
USING CHAPTER 13 TO KEEP YOUR VEHICLE
If you need to file a Chapter 13 readjustment of debts case for some other reason, you can surrender a vehicle under that option as well. But if you are keeping your vehicle, Chapter 13 gives you some major advantages:
- Often you are not required to catch up on the late payments, or can do so stretched out over several years if need be.
- In some circumstances, you can do a cram down – rewrite the vehicle loan to decrease the balance down to the fair market value of the vehicle. You can often also reduce the interest rate and/or stretch out the payments for a longer term. All of these changes usually result in a significantly reduced monthly payment. A vehicle cram down can be done if your loan is more than two and a half years old when your Chapter 13 case is filed.
- The automatic stay that prevents your vehicle from being repossessed lasts the length of your three-to-five year Chapter 13 case, instead of just the three months or so of a Chapter 7 case. For this extensive protection to last, you are required to keep up the plan payments and meet any other obligations. The creditor can at any time ask the bankruptcy judge for permission to go ahead with repossession, especially if you miss any payments or let your insurance lapse. But the potential protection is still so much better than under Chapter 7.
- You likely have the flexibility to change your mind and surrender your vehicle later if your circumstances change.
Using Chapter 13 also has potential disadvantages. It is much more expensive and takes so much longer to finish. If you are doing a cram down or surrendering the vehicle, you may have to pay a portion of the unsecured or deficiency amounts along with your other general unsecured creditors. Chapter 13 can be an excellent tool for keeping your vehicle, but you first need to understand it thoroughly.
If you are in the Dallas-Fort Worth metroplex, The Law Offices of Roger Fuller can help you stop a pending vehicle repossession and decide whether Chapter 7 or Chapter 13 is the better option for you. Please contact us at The Law Offices of Roger Fuller so we can show you how to get the best use out of the automatic stay to meet your unique needs. Schedule your free and confidential consultation either by calling 214-516-6187 or by reaching us here.