Filing a “straight bankruptcy” Chapter 7 case stops the repo man even if he’s about to grab your car or truck. What happens next?
The moment your bankruptcy case is filed, the “automatic stay” of federal bankruptcy law is imposed on your creditors, stopping all of their collection activity. In our last blog we showed how that applied to phone calls from creditors, their lawsuits and garnishments. Vehicles present a special situation.
Step by step, how does the automatic stay stop the repossession? How long does this protection last? What does it take to keep my vehicle? What if I decide to surrender it to the vehicle lender in the end?
As with the last blog, we’ll show how this works is with an example.
Adam, a single parent, lost his job a year ago, and struggled to keep up his vehicle loan payments while being unemployed for 10 months. Then a couple months ago he got a new job, but is still overwhelmed by the debts he could not pay on time while he wasn’t working, most of which are now many months behind and being sent to collections. In his new job he only makes enough money for immediate expenses plus his vehicle payment. He is not able to get more hours or increase his income with a second job because of his responsibilities to his school-aged son. He absolutely must keep his vehicle because there is no public transportation to his workplace. He has again slipped into being past 30 days late on his vehicle loan, after being told earlier by his lender that because of his recent poor payment record if he ever let that happen again his vehicle would be repossessed. Adam has been avoiding parking anywhere near his home for fear of having his vehicle repossessed, and is hoping that his vehicle lender doesn’t yet know where he works.
After seeing an experienced bankruptcy attorney and finding out his options, Adam decides to file a Chapter 7 bankruptcy case to discharge (legally write off) his other debts so that he can get and stay on top of his vehicle payments.
Stopping the Repossession
The effect of a bankruptcy filing is instantaneous. When Adam’s bankruptcy case is electronically filed by his attorney, that filing stops, among other things, “any act to… enforce any lien… .” A vehicle repossession is the lender’s act to enforce its lien on the vehicle.
But because the official bankruptcy notice would usually not get to the vehicle lender by mail for about a week after filing, Adam’s attorney contacts the lender or its attorney about the bankruptcy filing right after it occurs. Providing the lender with the Chapter 7 case number gives it an easy way to independently confirm that the case has in fact been filed and the automatic stay imposed. Once the lender or its attorney has the case number, it knows that repossessing the vehicle would be a violation of federal law, resulting in significant punishment. So at this point, Adam can rest assured that his vehicle is safe.
How Long the Protection Lasts
Under Chapter 7, the automatic stay and its protection can last until the debts in the case are discharged, which is generally about three months after the case is filed. In the meantime, Adam’s attorney makes arrangements with the lender’s attorney for Adam to bring the vehicle loan payments current. Adam would usually sign a “reaffirmation agreement” agreeing to exclude the vehicle loan from the discharge of his other debts. Once the payments are current and the reaffirmation agreement has been filed at the bankruptcy court, the lender is happy and has no grounds to repossess the vehicle. So Adam no longer needs the protection of the automatic stay. He’s eliminated his other debts, enabling him to catch up on and maintain his vehicle payments. Mission accomplished.
The Lender’s Motion to End the Protection
However, if Adam either can’t or decides he does not want to bring the account current during this period between the filing of the case and the discharge of the debts, and/or he lets the insurance lapse, the lender can file a motion asking for “relief from the automatic stay.” This is a request to the judge to end the protection of the automatic stay as to that vehicle, which would then allow the lender to repossess the vehicle.
Depending on the circumstances, Adam’s attorney may advise him to fight this motion, particularly if Adam still wants to keep the vehicle and has the means to do so. An aggressive lender may file this kind of motion to put pressure on Adam to get the payments current more quickly. These matters are often resolved with a settlement resulting in the vehicle loan being brought current and reaffirmed, leaving everybody happy.
Decision to Surrender the Vehicle
But if in the meantime Adam has figured out a way to get another vehicle—such as buying one over time from a friend—he may no longer want to keep his vehicle. That may have been his intention from the beginning. By filing a Chapter 7 case, he gets to keep that vehicle for an additional month or two without fear of it getting repossessed in the meantime, sometimes without making any payments on it. (He must absolutely maintain his insurance, though, to comply with the law and be a responsible driver.)
Then once he surrenders the vehicle to his lender, the likely “deficiency balance” on his vehicle loan will be discharged through his Chapter 7 case. That’s the amount—often thousands of dollars—he would usually owe on that vehicle loan after the lender sells the vehicle at an auto auction, applies the proceeds, and adds on all the costs of repossession and sale.
In this scenario, Adam lets his vehicle go when he’s ready to do so, and he owes nothing more on it.