Chapter 7 stops a repossession of your vehicle for lapsed insurance, but almost always the amount of time it buys you is very short.
Our last blog post went through a list of ways Chapter 7 buys you time with your vehicle lender. Included in that list was that it gives you “a very limited time to reinstate required vehicle insurance.” This deserves more attention.
Vehicle Insurance Required
According to Minimum Car Insurance Requirements by State, a recent article in nerdwallet.com, almost every state’s laws require vehicle owners to have at least a certain dollar amount of liability insurance coverage. That covers damages that you cause in an accident. The one state that doesn’t require liability coverage is New Hampshire. There are other exceptions. In Virginia drivers with a clean driving record can drive without liability insurance by simply paying an annual fee. In Arizona and some other states you can avoid liability insurance by providing a bond, certificate of deposit, or cash to the DMV.
According to this wallethub.com article 15 states also require personal injury protection (PIP) insurance. That covers medical expenses from an accident, for you, household members, and your passengers, regardless of fault. Also, 21 states require uninsured and underinsured motorist coverage. This covers you when you’re harmed by someone with no insurance or an insufficient amount.
Your vehicle lender or lessor requires two other kinds of insurance to protect your vehicle, its collateral. Collision insurance covers your vehicle in an accident. Comprehensive insurance covers it in events other than an accident, such as theft and fire.
The Urgency of Vehicle Insurance Coverage
Vehicle lenders and lessors get extremely concerned if your insurance coverage lapses. That’s because then at any moment their collateral could be totaled and turn worthless.
If you miss a payment deadline, the lender/lessor is only out a few dollars. But if you have no insurance it’s potentially out the entire loan/lease balance.
This is why as part of your loan or lease agreement:
- you must maintain insurance throughout the term of your loan or lease
- your lender/lessor must be named in your insurance as a loss payee (it gets paid if your vehicle is damaged)
- the collision and comprehensive coverages must be enough to cover the vehicle’s full value, with limited dollar amount deductibles
- if your insurance ever lapses the lender/lessor can “force-place” insurance and make you pay for it.
As a result of such contractual requirements your lender/lessor can legally repossess your vehicle whenever your insurance coverage lapses.
Buying You Time in Chapter 7
The moment you file a Chapter 7 “straight bankruptcy” case through your bankruptcy lawyer your vehicle is protected by the “automatic stay.” See Section 362 of the U.S. Bankruptcy Code. This prevents your lender/lessor from repossessing your vehicle. That’s true whether you’re behind on monthly payments or your insurance has lapsed.
So if your vehicle insurance has lapsed before filing your Chapter 7 case, that filing buys you some time to get the insurance reinstated. But, as the title to this blog post says, it usually only buys you a very short amount of time.
Why’s that? It’s because the lender/lessor’s concern about losing its collateral is a legitimate one. The bankruptcy court respects that concern. Lapsed insurance will encourage the lender/lessor to quickly file a motion with the court for “relief from the automatic stay.” That is a formal request to be able to repossess the vehicle, in this case for lack of insurance. The court will grant that motion unless you’ve reinstated insurance by the time the court hears the motion. So filing bankruptcy may only buy you a few more days or a couple weeks to get insurance.
Also, in the meantime the lender/lessor can force-place its own insurance on your vehicle. It adds the cost of this insurance to your balance, and it’s astoundingly expensive. Furthermore, force-placed insurance only protects the lender. You’re still violating state law by driving uninsured. And of course driving without insurance is extremely risky. Plus this cost will significantly increase the amount you need to pay to get current.
Filing a Chapter 7 bankruptcy will prevent your vehicle from being repossessed for lapsed insurance. But the amount of time the filing buys before you need to reinstate the insurance is quite short. Plus the force-placed insurance will make catching up on your loan/lease cost you much more. So, stopping a repossession for lapsed insurance can be great, but the amount of time it buys you for this violation of your vehicle loan/lease is very limited.