Bankruptcy will stop a repossession very fast. Then a month or so later you surrender the vehicle, but gain some key advantages.
If you are behind on your vehicle payments, AND recognize that you can no longer afford the vehicle, filing bankruptcy gives you the following advantages:
- Instead of having your vehicle be repossessed at a time that may be incredibly inconvenient to you—from your employer’s parking lot or in front of a relative’s house, for example—you could surrender it at a time more convenient to you.
- You would be able to keep your vehicle an extra month or so without paying anything more for it (although you should keep insurance in effect), and without worrying about it being repossessed at any moment.
- The “deficiency balance”—the amount you would owe if you surrendered the vehicle without a bankruptcy, often many thousands of dollars—would be discharged (legally written off) in bankruptcy.
Timing—Imposing the “Automatic Stay”
Filing bankruptcy—either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts”—immediately prevents your vehicle from being repossessed. The moment the bankruptcy case is filed, the “automatic stay” instantly goes into effect. It’s like a court order stopping any repossessions and other collection actions. It’s automatic—as a matter of federal law the bankruptcy filing itself “operates as a stay” of repossession. There’s no delay in getting a court order, and the vehicle lender can’t prevent it from being imposed.
Although it is immediate and automatic, when there is a threat of foreclosure your attorney will inform the vehicle lender about your bankruptcy filing so it knows about it and does not repossess your vehicle.
Timing—Surrendering the Vehicle
If you are not planning on keeping your vehicle, you will need to formally state your intent to surrender on your bankruptcy documents. You will not have to make any further payments on it, including the back payments.
However, it’s illegal and dangerous to let the insurance lapse. Beyond your sense of responsibility to other drivers, if you do get into an accident any resulting medical expenses for yourself and any liability to passengers, drivers, pedestrians, etc. could not be incorporated into your bankruptcy case, since only those liabilities that were in existence at the time your case was filed can be. Any criminal liability (including certain traffic) would not be included regardless of the timing.
About a month after your case is filed there is a hearing with your bankruptcy trustee that you attend called (somewhat misleadingly) the “First Meeting of Creditors.” Usually at or around the time of that hearing the trustee goes through the formality of stating that he or she has no interest in the vehicle (because almost always there is no equity in vehicles being surrendered). Then the vehicle lender can start making arrangements for you to give the vehicle back to it. Sometimes it sends a representative to the hearing itself to expedite the process. Or else it contacts your attorney. The arrangements can usually be made in a way reasonably convenient to you.
Avoiding Liability for the Deficiency Balance
If you are surrendering a vehicle, it’s very likely that you would owe what is usually referred to as a deficiency balance.” That’s the debt remaining after the lender sells the vehicle (usually at an auto auction) and credits the proceeds to your account.
There is almost always a balance owed remaining because 1) the auction sale price is relatively low (but that’s the quickest and most efficient way for the creditor to sell your vehicle); 2) the costs of sale—the auctioneer’s commission, any storage or transportation fees, and such—are charged against the proceeds; 3) any contractual late fees, attorney fees, and similar costs are also charged against the proceeds; and 4) if your credit wasn’t great when you got the loan, the likely higher interest rate means your loan balance was likely comparatively high considering how long you’ve been paying, plus any missed payments would pump that balance that much higher.
Instead of getting sued and garnished to pay that deficiency balance, Chapter 7 case would virtually always discharge (legally write off) that debt. A Chapter 13 would do so as well, usually without increasing what you would be obligated to pay into your plan.
Bankruptcy would not only stop a pending repossession, it would give you more time with your vehicle without the fear of it disappearing at any time and without paying for that extra time. And any deficiency balance would be discharged instead of you being forced to pay it.