Chapter 7 and Your Vehicle Loan or Lease

Wasson and ThornhillVehicle Loans

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A timely Chapter 7 filing helps in diverse situations with your vehicle loan or lease. Check out these 7 ways Chapter 7 gives you big advantages.

We’re in a series on the smart timing of your bankruptcy case. Last week we got into filing bankruptcy to stop a vehicle repossession or surrender. We referred broadly about how Chapter 7 and Chapter 13 can help with your vehicle loan. But that didn’t allow us to cover the many situations in which bankruptcy really helps with this. 

So today we show you the diverse ways that a well-timed Chapter 7 “straight bankruptcy” filing serves you. These cover both when you want to keep your car or truck AND when you are surrendering it. Also included is when you don’t yet know what you want to do with your car or truck loan or lease.

Buy Time on Your Vehicle Loan or Lease

Chapter 7 “straight bankruptcy” does all of the following. It:

  1. Immediately stops your vehicle from being repossessed, so you can decide and/or implement what’s next
  2. If you’re behind on the loan or lease payments, gives you a bit of time to catch up if you’re behind on payments
  3. If you’re current on your payments but barely, gets rid of other debts so that you can afford your loan or lease
  4. If you’ve let the required vehicle insurance lapse, gives you a very limited time to reinstate the insurance
  5. If you have decided to surrender your vehicle, gains you some time to get another vehicle before surrendering your current one
  6. If you qualify to redeem your vehicle for less than you owe, buys you time to get the money together
  7. If you can get a redemption loan to lower your debt on the vehicle, gives you the time to do that

1. Stop Repossession

As we covered last week, getting a vehicle repossessed is almost never a sensible way to end a vehicle loan or lease. You’re not in control of the timing. Of course it can be extremely inconvenient. It’s often a humiliating experience. And if you need to keep the vehicle, getting it back after repossession is very expensive.

Even if you’ve decided to let the vehicle go, having it be repossessed, or surrendering it yourself, is usually a bad idea. You often end up owing a shocking amount of money on the loan or lease. You can likely write that off in an upcoming bankruptcy filing. But it’s usually much smarter to find out your options beforehand. You may learn you had options under the bankruptcy laws for keeping the vehicle that you weren’t aware of. At the least you could have bought time to transition into your next means of transportation more calmly.

Filing a Chapter 7 case immediately imposes the “automatic stay,” a broad freeze of all creditor collection actions. The law specifically says that the mere filing of the bankruptcy petition “operates as a stay [a legal freeze] of . . . (3) any act to obtain possession of [your] property” and (4) any act to . . . enforce any lien against [your] property. U.S. Bankruptcy Code, Section 362(a).

So once you and your Louisville lawyer file your bankruptcy case, your car or truck cannot be repossessed. You prevent that bad result and buy some time for your next step.

2. More Time to Get Current on Loan or Lease Payments

If you’re behind on vehicle loan or lease payments, the next step may be to catch up on those payments. Because of the automatic stay’s protection, you can do so without being under the gun of immediate repossession. Usually your Louisville bankruptcy lawyer would contact your lender or lessor to inform it about the Chapter 7 filing. At that point he or she would verify how much you’re behind and make arrangements for you to catch up.

How much time would you have to catch up? That depends on the circumstances, including your prior payment record and the flexibility of your lender or lessor. Usually you have to catch up within a couple months after the filing of your Chapter 7 case.

That’s because with either a vehicle loan or lease paperwork needs to be filed before the end of the case. And a Chapter 7 case generally lasts only about 3 or 4 months. The creditor usually want the catch-up arrangements to be settled within a few weeks after the bankruptcy filing, the catch up payments started and completed within a month or two of that, and the paperwork signed and filed around then as well.

If you are not able to catch up that fast, and you really need the vehicle, Chapter 13 may be a better alternative. Chapter 13 is a more powerful tool with vehicle loans and leases. It can stretch out your catch-up payments over a much longer period. Chapter 13 can also often lower your monthly loan payments. That’s almost never possible under Chapter 7. Before you file your case your Louisville bankruptcy lawyer will discuss the advantages and disadvantages of these two options with you.

3. Enables You to Stay Current on the Loan or Lease

You may be current on your vehicle loan or lease payments, but only barely. You’re likely managing to make those payments because it’s just about your highest priority. But you’re letting other debts and expenses slide. You know you can’t keep this up.

You may even be worried about lawsuits turning into garnishment of your paychecks and/or bank accounts. If that were to happen you would not be able to make your vehicle payments.

How would filing a Chapter 7 bankruptcy help? It would very likely permanently get rid of your other debts so that you could comfortably pay your vehicle payments. You could more easily afford your car or truck insurance. You could better keep up on vehicle maintenance and any needed repairs. It could buy you a lot of peace of mind about keeping your vehicle. And having a more financially peaceful life altogether.

To get there you’ve got to file your Chapter 7 case before these bad things happen.

Next . . .

Next week we’ll cover the rest of the situations (#4—7) in which a timely filed Chapter 7 case gives you important advantages with your vehicle loan or lease.