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Filing bankruptcy under any chapter of the United States Bankruptcy Code immediately results in an “automatic stay” (similar to a restraining order) that prohibits repossession of the debtor’s vehicle and most other collection actions. If an automobile lender repossesses the debtor’s vehicle with knowledge of the bankruptcy filing, the lender and the repossession agent will likely be held in contempt of court and punished by fine, imprisonment, or both, and also will likely be ordered to compensate the debtor, as well as return the vehicle to the debtor.

Under Chapter 7, a debtor has the following options regarding his or her vehicle loan:

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 within about 60 days after filing bankruptcy and discharge all further liability on the loan.

The automatic stay as to vehicles subject to most types of vehicle loans 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 or she is essentially excluding that debt from the bankruptcy and agrees to continue to be liable for the debt. To reaffirm a debt, the debtor must sign a standardized “reaffirmation agreement” that is prepared and sent to him or her by the vehicle lender.

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 does not require a vehicle lender to agree to reaffirmation if the vehicle loan is delinquent unless the debtor works out an arrangement with the lender. If the vehicle loan is delinquent when the Chapter 7 bankruptcy is filed and the debtor does not bring it current or work out an arrangement 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 regarding his or her vehicle loan:

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 his or her 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, aka a “title loan”), 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, an appraisal, or other reliable and acceptable proof of value. This process is typically referred to as “cramdown”.

Regardless of the date of the vehicle loan, Chapter 13 also allows the debtor to lower the interest rate to a market rate of interest (usually around 6%) 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.