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Should I File Bankruptcy If I'm Facing Vehicle Repossession?


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4/10/2012
Tobias Licker, Esq.
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If you are unable to make your car payments, your lender may have threatened you with vehicle repossession or taken steps to repossess your vehicle. You may be considering filing bankruptcy in order to avoid repossession. In some cases, this is the best option.
Automatic Stay
Regardless of whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, you're entitled to an automatic stay against your creditors while your bankruptcy is in process. This means that your creditors cannot take action to collect the debt until the bankruptcy case is finished. Thus, your car lender won't be able to repossess your vehicle while you are filing for bankruptcy. The automatic stay doesn't guarantee that you will be able to keep your vehicle long-term, but it does give you time to work out the arrangement that's in your best interest. It also depends on which chapter you file under.

 
Reaffirmation
If you file for Chapter 7 bankruptcy, you can reaffirm your vehicle loan. This means that you sign a new agreement with your car lender to normally with the same terms as the original contract. Previous late payments are normally added to the loan balance. Reaffirmation leaves you responsible for your car loan rather than discharging the loan via bankruptcy. However, if the reason you can't pay your car loan is because of other debts, filing for Chapter 7 bankruptcy is often a good solution. Chapter 7 will discharge some of your other obligations so that you can use your income to pay your car loan instead of choosing between your car loan and other debts. Another alternative in a chapter 7 bankruptcy is to redeem your car loan. That means you will have a new car creditor who will pay off your car loan and you sign a new agreement with your new car creditor. Redemption pays off only the value of the vehicle, not the car loan. This means in most cases a saving. Additional attorney fees for filing the motion to redeem are normally part of the new car loan and don’t have to be paid by the debtor upfront. Motor vehicles are eligible for redemption if they have less than 100,000 miles and are less than 7 years old.
Structured Repayment Plan
If you file for Chapter 13 bankruptcy, you can include your car loan in your structured repayment plan. This allows you to repay the loan over the course of the next three to five years, including all arrears you owe on the loan. As long as you stay current on your Chapter 13 plan, your vehicle will not be repossessed. Repaying your vehicle in a chapter 13 bankruptcy case is often a preferred option because the monthly plan payment which includes attorney fees, trustee’s fees and other debts is often lower than the original car payment. The car loan can be stretched out as far as 60 months and the debtor pays only the court’s interest rate which is normally lower than the contract interest rate. What is called in a chapter 7 “redemption” is called in a chapter 13 “cram down”. If your vehicle was purchased more than 2.5 years before filing of the bankruptcy case you pay only the value of the car and not the loan balance. This is often a substantial savings.
No Retroactivity
It's important to realize that the automatic stay is not retroactive. If your lender has already garnished wages it is most often too late to recover the money. However, everything that is taken out after filing, will need to be returned to you. If your bank account is frozen you can keep your money as long as the bank has not paid the money to your creditor. If your car has been repossessed, your car creditor has to return the case as long it has not been sold at an auction.. Thus, if you are considering filing for bankruptcy, you need to make your decision before the it is too late and your creditor either sells your property or receives your money.
Considerations
Some people think they can avoid repossession without filing bankruptcy if they voluntarily surrender their vehicle. However, if you give your vehicle back to the bank, in most cases the lender reports it as a voluntary repossession, which harms your credit. It may be in your best interest to file for bankruptcy instead. If you wish to surrender your vehicle through bankruptcy, you won’t be liable for any deficiency after your car creditor sells your vehicle.
Before you file your bankruptcy attorney will discuss whether you have any non-exempt equity in your vehicle which would have to be paid to the trustee in a chapter 7 or would be part of the chapter 13 plan payment.
If you are living in the St. Louis area and have a question for a bankruptcy attorney in St. Louis, please do not hesitate to contact us. Our office offers a free consultation and has four offices throughout the St. Louis Metro area. Offices are located in St. Louis City, Florissant, St. Charles, and Granite City.


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