Whether your car is about to be repossessed or has already been repossessed, filing bankruptcy can help you save your car.
Upon filing a bankruptcy, an automatic stay takes effect, unless the person filing has had two more active bankruptcies in the last year. The automatic stay is essentially a federal court order that tells creditors that they cannot take any action to collect on a debt, such as phone calls, collection letters, lawsuits, garnishments, seizure, foreclosure, and repossession. The automatic stay also allows for recovery of "property of the estate", which includes a repossessed vehicle that can still be redeemed by law.
If your car is about to be repossessed, the automatic stay would prevent the auto creditor from taking your car. However, the relief provided by the automatic stay varies by the type of bankruptcy being filed. Chapter 7 would most likely provide protection that lasts 1-3 months, whereas Chapter 13 would provide protection for 3-5 years as long as the terms of the confirmed plan are being followed and the car is insured as required [see below for more information on how auto loans are treated in Chapter 13]. As such, Chapter 7 may not be the best option for saving a car if a person does not have the funds available to cure the default in payments or the ability to redeem the vehicle through the bankruptcy process.
If your car has already been repossessed, it is possible to force the auto loan creditor to return the vehicle and accept reasonable repayment terms through a Chapter 13 plan. However, once the vehicle has been repossessed, action should be taken right away to recover the vehicle. Under Michigan law, an auto lender must allow a person 15 days to redeem the vehicle before they can try and sell the vehicle at an auction. In other words, if a person wants to save their car, they must file a Chapter 13 prior to the 15-day redemption period expiring. Once the car is auctioned it is too late.
Treating Auto Loans in Chapter 13
Chapter 13 allows an individual to prevent repossession and recover vehicles that have already been repossessed but not yet auctioned. Chapter 13 allows an individual to modify an auto loan in several ways. If a vehicle was purchased over 910 days prior to the date the Chapter 13 is filed, the auto loan can be modified as follows: (1) lower the total amount to be repaid in full as a secured claim to the market value of the car; (2) lower the interest rate to approximately 5%; and (3) extend the term of the repayment of the auto loan up to 5 years. If the vehicle was purchased within 910 days of the filing date of the Chapter 13, the auto loan can be modified as follows: (1) lower the interest rate to approximately 5%; and (2) extend the term of the repayment of the auto loan up to 5 years. In most cases, Chapter 13 allows an individual to significantly lower an auto loan payment.
Treating Auto Loan Deficiency Debt
If your car has been repossessed and auctioned or you do not want to save the car, it is possible to get relief from the auto loan deficiency debt (difference between what is owed and the amount the car is sold for at auction). Auto loan deficiency debt is considered general unsecured debt. As such, it can be discharged by filing Chapter 7 or Chapter 13 bankruptcy. Chapter 7 would allow an individual to discharge the total amount owed with no repayment. Chapter 13 would allow an individual to discharge the total amount owed by paying a percentage or fraction of what is owed (typically 10% or less is paid through a Chapter 13 plan and the other unpaid percentage is discharged).
The Bottom Line
Most bankruptcy attorneys offer free consultations. If your car is about to repossessed or has already been repossessed, take advantage of a free consultation. By consulting with a knowledgeable bankruptcy attorney, you can find out what your options are and get help deciding what option makes the most sense for you.
Visit Law Offices of Ryan F. Beach
This website is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.