Can bankruptcy help prevent the repossession of a financed car?

On Behalf of | Apr 8, 2022 | debt relief |

You can break consumer debts into categories. The first includes unsecured debt, like hospital bills not covered by insurance or the balances on your credit cards. The second category includes secured debts, which are financial obligations secured by collateral property.

Two of the most common forms of secured debts are mortgages and car loans. The item an individual wants to purchase with lender financing serves as collateral for the loan. If they fall behind on payments, the lender can reclaim the collateral property to recoup the money they invested.

Personal bankruptcy is a way for people to stop aggressive collection activity and get rid of some of their unsecured debts. Can filing for bankruptcy help you prevent vehicle repossession?

Yes, an automatic stay will temporarily prevent repossession

As soon as you file for bankruptcy, the courts issue an automatic stay which prevents collection activity until they move forward with or dismiss your case.

Repossession is a kind of collection activity, so you can stop it in the short term when you file. However, the lender can go to the court and ask the judge to lift the stay to allow them to repossess the vehicle.

Waiting until repossession occurs may be too late

If you fall behind on your mortgage, your lender must advise you in writing about the issue and warn you that they could pursue foreclosure proceedings for the property. Lenders for financed vehicles typically do not need to provide similar notice before repossessing the vehicle.

If the terms of the loan do not require such a disclosure, the lender can likely repossess the vehicle with no forewarning once you have missed a certain number of payments. Your loan paperwork may include the company’s policy regarding how many missed payments will trigger repossession attempts.

If you think the lender will repossess your vehicle, it is better to err on the side of caution. As soon as you are at risk of repossession because you have fallen behind and cannot catch up on your payments, you may need to consider filing for personal bankruptcy to prevent the repossession of the vehicle and possibly give you better leverage to renegotiate your debt.

Avoiding vehicle repossession can play a big role in attempts to regain control over your finances.