Crucial Question: Can Bankruptcy Allow You to Keep Your Vehicle Even If Behind on Payments?
Bankruptcy can make it possible to keep your vehicle. You have two ways, depending on how much help you need.
Two Ways to Permanently Keep Your Vehicle
If you are behind on your vehicle payments AND want to keep the vehicle, Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” provide different tools to do so.
Which is the better way to go largely depends on the answers to two questions:
1) Can you get current on the loan within about two months after filing bankruptcy, after no longer having to pay your other debts?
2) Did you buy and finance your vehicle more than 910 days (about 2 and half years) ago?
If the answer to the first question is “yes,” then Chapter 7 could well be right for you.
If the answer to that first question is “no,” then you likely need the bigger help that Chapter 13 gives you.
If the answer to the second question is “yes,” then a Chapter 13 may be appropriate regardless of the answer to the first question.
In this blog post we cover Chapter 7. In the next one, Chapter 13.
Using Chapter 7 to Keep Your Vehicle
If you are current on your vehicle or can get current very soon after filing bankruptcy, you can continue making your regular payments and can almost always keep your vehicle under Chapter 7.
How Soon is Very Soon?
If you are not current on your vehicle loan payments, in almost all situations your creditor will insist that you bring those payments current within about two months after your Chapter 7 case is filed.
Talk with your attorney to find out if your vehicle creditor might be willing to make an exception. You may have leverage if your contract has you paying more for your vehicle than its marketable value. And certain kinds of creditors tend to be more flexible, typically local vehicle finance companies and such.
But most creditors will insist on you bringing the account current quickly because they want the security of a binding “reaffirmation agreement.” That is a document typically prepared by your creditor that you sign and your attorney files at the bankruptcy court. It excludes the vehicle loan from the write-off (“discharge”) of your other debts. For it to be binding, it must be filed before your debts are legally discharged and your Chapter 7 case is closed.
Chapter 7 cases are generally closed right after the discharge is entered, which generally happens on or about 61 days after your “First Meeting of Creditors,” which in turn happens about a month after your case is filed. That’s a total of about three months. So the loan must be brought current in time for the reaffirmation agreement to be prepared, signed and filed at the bankruptcy before that three-month-or-so deadline.
Why Creditors Are So Pushy about “Reaffirmation”
Your vehicle loan creditor would naturally prefer not to lose money on its loan with you. If it did not get a legally binding reaffirmation agreement from you and then down the line needed to repossess your vehicle, it could not come after you for any “deficiency balance.” That’s the amount you would owe if its sale of your vehicle (usually at an auto auction) would not cover the entire loan balance (including the costs of repossession, late fees, etc.).
The creditor wants to get assurance that you will pay it in full, whether by making all the payments or by being stuck with paying the “deficiency balance” if there was a future repossession. So it uses the leverage of your desire to keep your vehicle to insist on a reaffirmation agreement, which forces you to bring the account current in time for that to be prepared and filed on time.