Lenders can be prevented from repossessing a car owned by a debtor if he or she files for a Chapter 7 or Chapter 13 bankruptcy. However, the lender may still be able to repossess the car with the court’s permission.
Once a debtor declares bankruptcy, the debtor is granted an automatic stay. An automatic stay prevents a creditor from taking certain properties from a debtor.
The only way a creditor can get around an automatic stay is to be granted court permission. To do this, a creditor must file a motion “for relief from the automatic stay” with the court. The motion must convince the court the creditor has a high interest in the property and a right to repossess the car. The creditor must also stress through the motion that its interests are not adequately protected because the debtor is not making timely loan payments or are otherwise in default.
A debtor has two weeks to oppose a creditor’s motion for relief. Once the debtor files an opposition to the creditor’s motion, a hearing is normally held within 30 days. A judge can deny a motion if the debtor can show it was procedurally flawed, or if the creditor made a mistake. At this time the judge will often suggest the creditor and the debtor meet to come to an agreement. If a negotiation fails to occur, it is likely a judge could grant the motion to lift the automatic stay and allow the creditor to repossess the car.
However, there are ways to prevent a car from being repossessed after the automatic stay has been lifted. The best way to do this is to bring your loan current and start making your normal monthly payments again. The lender can only repossess the car if the loan is in default. Most likely, the lender will prefer for you to make your payments rather than have to repossess the car. Once a debtor gets behind on payments; however, it can be very difficult to catch up.
Another option we recommend is to negotiate with the lender. Car lenders make money by receiving interest on monthly payments. It is likely a lender would rather the debtor keep the car and continues to make interest payments. A lender may be willing to reduce the monthly payments, interest rate, or even the principal balance. A lender is willing to do this because they are unlikely to receive any future payments if the debtor goes into bankruptcy. Debtors should be weary of this tactic though. A new loan agreement will be most likely have to be signed, which means the debtor will still be liable for the loan after a bankruptcy discharge.
Finally, a debtor may be able to redeem their car during Chapter 7 bankruptcy for the car’s fair market value. To do this, the debtor must file a motion with the court and be able to purchase the car for a lump sum. This could be a good option if the car is worth much less than the loan balance. If a debtor uses this method, he or she will own the car outright after bankruptcy.
For more information, contact the Law Office of David M. Goldman, PLLC today at 904-685-1200.