What happens to your car loan when you file Chapter 7?

If you file a Chapter 7 bankruptcy and are behind on your car loan payments, the lender cannot repossess your vehicle or try to collect it another way without getting permission from the court.

If the lender wants to reclaim the vehicle, they must request that the court lift the automatic stay that goes into place when a bankruptcy is filed. The motion is for relief from the stay, showing that they have a legal interest and a right to repossess, and that their interests are not protected because you are not making payments on time or not at all.

There is typically a two week period for you to oppose the lender’s motion, which, if granted, means the court sets a hearing within 30-days from the date the motion was filed. The lender’s motion may be denied if it is flawed or the lender made a mistake like applying your payment to someone else’s account.

However, even if there is an issue with the motion, the hearing can be continued until you and the lender reach an agreement. Generally, if you are not negotiating with the lender, or making an effort to arrange payment, the judge grants the lender permission to repossess your vehicle.

If you want to keep your car and not have it repossessed, here are some steps to consider:

  • If you can afford to make up the payments and/or obtain the required insurance, do so.
  • Negotiate with the lender. They would rather have you continue to pay rather than repossess. They may consider reducing payments, the principle balance or the interest rate. Remember though, that a new agreement is reaffirming your debt and despite a bankruptcy discharge, you are still liable for your car loan.
  • Buy back your car for its fair market value. This means filing a motion with the court and making a lump sum payment. This is beneficial is the car is worth less than your loan balance. If you buy the car back, you own it free and clear.

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