Filing Chapter 7 or 13 bankruptcy results in an “automatic stay” that immediately stops repossession of the debtor’s vehicle.
Under Chapter 7, the debtor has the following options:
1) retain the vehicle, “reaffirm” the debt and keep making regular payments to the creditor;
2) “redeem” the vehicle by making a lump sum payment to the creditor for its fair market value; or
3) surrender the vehicle to the creditor and discharge all further liability on the loan.
The automatic stay is terminated 30 days after the 341a meeting (also known as “meeting of creditors”) and the creditor can repossess the vehicle if the debtor does not voluntarily surrender it, sign a reaffirmation agreement, or redeem the vehicle.
When a debtor “reaffirms” a debt, he is essentially excluding that debt from his bankruptcy proceeding and agrees to continue to be liable for the debt. To reaffirm a debt, the debtor must sign a standardized “reaffirmation agreement”.
To reaffirm a vehicle loan, the debtor must either (a) be current on the loan, (b) bring the loan current within a couple of weeks after filing bankruptcy, or (c) work out a repayment agreement with the lender either before or after filing bankruptcy. Chapter 7 bankruptcy will not allow the debtor to retain the vehicle if the vehicle loan is delinquent unless he works out an arrangement with the lender. If the vehicle loan is delinquent when a debtor files Chapter 7 bankruptcy and he does not bring it current or work out an arangement with the lender, the lender may file a “motion for relief from the automatic stay” asking the bankruptcy court for permission to repossess the vehicle.
Under Chapter 13, the debtor has the following options:
1) retain the vehicle and make modified payments to a trustee through a repayment plan; or
2) “surrender” the vehicle to the creditor and discharge all or most of the debtor’s liability on the loan.
If the vehicle loan is more than 910 days (2 1/2 years) old or is a “non-purchase money loan” (a loan obtained on a vehicle the debtor already owned), the Chapter 13 repayment plan may reduce the principal balance of the loan to the vehicle’s “retail value” as determined by Kelley Blue Book, the NADA Vehicle Pricing Guide or an appraisal. This process is typically referred to as “cramdown”.
Regardless of the date of the vehicle loan, Chapter 13 also allows a debtor to lower the interest rate to a market rate of interest (usually about 7%) and also to extend the term of the loan up to a maximum of 5 years (60 months).
If the debtor falls behind in the modified vehicle payments during the Chapter 13 proceeding, the bankruptcy court may grant permission for the creditor to repossess the vehicle.