Other than a house, your vehicle may be the most valuable asset you own, but repossession may seem like your only option when you can’t make your car payments. With repossession, your bank can take your car, sell it and apply the proceeds toward your loan balance. However, bankruptcy may allow you to restructure your loan so you don’t face repossession, and bankruptcy can erase your remaining debt if your vehicle has already been repossessed.
Most individual bankruptcy filers use either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. If you file under Chapter 7, a court-appointed bankruptcy trustee will sell eligible assets, if any, and use the money to pay your creditors. Under Chapter 13, a repayment plan is established under which you make payments to your creditors using your disposable income. You qualify to file under Chapter 7 only if you meet certain income requirements established for residents of your state. Chapter 13 bankruptcy does not have income limitations but requires that you have some type of regular income.
You may be able to work with your creditors to adjust your payments, thereby eliminating the need for repossession. However, you can also stop repossession by filing for bankruptcy since it offers the protection of an automatic stay. An automatic stay stops your creditors from continuing their collection efforts, including repossession, and becomes effective immediately once you file. The stay does not reverse previous collection actions, though, so it will not undo a repossession, voluntary or not.
In a Chapter 7 case, your trustee can sell your property only if it is not protected by an exemption available under federal or state law. Although state laws vary regarding which exemptions you can use, vehicles are frequently eligible. However, if your vehicle has already been repossessed, your creditor may try to come after you for the balance owed on the loan. Since exemptions only protect assets from sale rather than eliminate any remaining debt on those assets, you can’t eliminate debt owed on your vehicle loan simply because the vehicle qualifies for a Chapter 7 exemption. Instead, the debt owed on your car loan is eligible for discharge, or elimination, once you have completed your Chapter 7 case.
Chapter 13 does not involve selling any assets, so exemptions aren’t necessary to protect your assets from bankruptcy liquidation. However, Chapter 13 bankruptcy may allow you to prevent repossession by catching up on your overdue car payments over the course of your repayment plan. While you are catching up on your payments, your lender is not permitted to take your vehicle because of the automatic stay. As in a Chapter 7 case, the bankruptcy court can discharge any vehicle loan debt that remains after you complete your repayment plan.