Vehicle repossessions have devastating consequences. Once a lender seizes a car or truck, vital transportation is often cut off. When a vehicle is a daily necessity, inability to qualify for another loan because of the repossession may mean higher expenses for transportation, such as costs for rental cars, taxis and rideshare services. For those who need a vehicle to continue working, the repossession can cost them their jobs. The only chance to get back on the road may be a second-chance finance store that charges punishing interest rates.
Can bankruptcy stop repossessions?
Thankfully, bankruptcy laws include specific protections for auto loan borrowers that allow them to stop repossessions.
Both the Chapter 7 and Chapter 13 bankruptcy codes provide for an automatic stay, which halts all collection activity, including auto repossessions. In a Chapter 7, the automatic stay lasts for several months. During that time, the petitioner can reaffirm the debt and avoid repossession. It’s important to know that all missed payments must be out of arrears, or payments that should have been made, before a reaffirmation agreement can take effect.
How does it work?
If the borrower does not enter into a reaffirmation agreement, the lender will repossess the car shortly after the court lifts the automatic stay. When dealing with an old car or a loan that is very upside down, it may be in the borrower’s best interest to let the lender take the vehicle and buy a new one.
Bankruptcy protects the borrower against deficiency judgments. When a car is repossessed outside of bankruptcy, the lender has the right to collect the difference the sales price and the loan balance, plus attorney fees and court costs. Because deficiency judgments often add up to thousands of dollars, avoiding them should be a priority.
A Chapter 13 provides this protection, though instead of reaffirming the debt, the petitioner proposes an altered payment plan to the court. In many cases, the debtor benefits from a cramdown of their auto loan. A cramdown allows the loan balance to be reduced to the value of the vehicle, eliminating negative equity. This makes a Chapter 13 desirable to debtors with auto loans that are severely under water.
Though bankruptcy provides a lifeline to those in danger of becoming carless, it also has a long-lasting negative affect on credit ratings. When a person’s whole financial picture is bleak, bankruptcy is often the best way to save a vehicle from repossession, resolve other debts and achieve a higher credit score post-bankruptcy. However, many people just need to resolve car loan issues and keep their credit in good standing. Here are several methods outside of bankruptcy that can prevent repossessions:
Make up late payments
Paying late usually does not result in a repossession. Some lenders consider a borrower in default after one day, but many consider a loan in default after 30 days. This information is provided in the loan contract. Regardless of the lender’s policy, avoiding a late payment longer than 29 days prevents a black mark on your credit profile.
If the loan is not yet in default, simply bringing it current solves the problem. Once you are in default, it’s necessary to reinstate the loan. Many lending companies send a written default notice and request the borrower contact them to make payment arrangements. Following through with the lender provides the cleanest way to avoid repossessions, default judgments and legal fees.
Can you get a repossessed vehicle back?
It’s possible to get the car back if the lender agrees to reinstate the loan. Some states require lenders to reinstate loans if the borrower cures the default. In states without this law, lenders may still provide this option in their loan contracts.
What if you don’t want the vehicle?
Surrendering the car to the lender can work as a way of eliminating the debt if bankruptcy is not a good option. The key is negotiating with the lender to take back the car with the agreement you are not responsible for any further payment, eliminating the possibility of a deficiency judgment.
Losing a vehicle to repossession damages credit and can lead to a situation where the borrower loses the car and must continue paying for it, with legal fees and other expenses added on. To avoid deficiency judgments, negotiate a payment agreement with the lender or an agreement to surrender the vehicle with no further liability. When borrowers are trapped in difficult financial circumstances, filing bankruptcy may to the only way to stop a repossession. Both Chapter 7 and Chapter 13 offer options for keeping vehicles, though Chapter 13 provides the unique feature of cramdowns on auto loans, which eliminate negative equity and reduce monthly payments.
If you are facing repossession and are struggling with overwhelming debt, personal bankruptcy could be an option. Our full-service bankruptcy firm, Hines Law Offices, has been helping residents throughout the state of Massachusetts with debt solutions for over 20 years. Our Bankruptcy Law Firm will fight for your rights to get a fresh start. If you are suffering under an impossible debt load, contact us today and let our professional firm assist you with a Free Case Evaluation!