Bankruptcy and Cars | Ultimate Guide to Car Loans and Repos

bankruptcy and cars repossession loans

Bankruptcy and Cars

There’s a lot of confusion about bankruptcy and cars. Can you keep your car if you file bankruptcy? What about bankruptcy and car repossession. You’re late on a car payments, can bankruptcy stop repo and help you catch up on car payments? Lots of questions. I hope to answer these below.

Cars and Chapter 7 Bankruptcy

Can I File Bankruptcy and Keep My Car

Can I file bankruptcy and keep my car? The answer to this bankruptcy and cars question is: yes.  Now, you don’t get a free car in bankruptcy. If you’re going to keep your car, you have to keep making the payments to them, even if they stop sending you statements. But as long as you pay them — and you do a car reaffirmation agreement — you should keep your car.

READ MORE: Chapter 7 Bankruptcy – Essential Guide for Fresh Starts

Car Loan after Bankruptcy


People also ask a lot, “is it possible to get a car loan after bankruptcy?” The answer is yes, with a catch. Bankruptcy is bad for your credit report. They’ll report it against you for up to ten years. That doesn’t mean you can’t get credit or a car loan after bankruptcy.  The real question to answer the question is: at what interest rate? See, once you file bankruptcy and get a discharge, you can’t file another bankruptcy and be eligible for bankruptcy discharge for years. So anyone who lends you money after bankruptcy is safe. They can sue you and you can’t file bankruptcy to stop it or save your money or assets or paycheck from wage garnishment.

Why’d They’re Happy to Lend to You

So a car lender can lend you a car and they have a few things going for them. First, if you don’t pay for the car, they can just take it back and sell it to someone else. They’re not out anything. Well, not as much as they’d be out if there was not collateral or security interest. Second, because you are looking for a car loan after bankruptcy, they can justify a super high interest rate, which for you would be insane. They’re taking a risk on you, and to get compensated for it.

Third, if you sign up for this car loan after bankruptcy, then stop paying, they 1) get the car back, and 2) you promised to pay for a high-interest debt which you still owe, and 3) back where we started: you can’t file bankruptcy to save yourself from collections.

In short, yes, you can get a car loan after bankruptcy. But if you default on the loan, now you have a bankruptcy and car repossession. But a huge left over debt, and they’re allowed to sue you for the balance and you have no safe harbor from it. So be very careful about signing up for any car loan after bankruptcy: if you don’t pay, you are trapped with potentially thousands of dollars of debt that, in the short-term, a bankruptcy won’t be able to help you with.

READ MORE: Credit After Bankruptcy

Chapter 13 Bankruptcy and Cars

Bankruptcy and cars also overlap in Chapter 13.  A Chapter 13 bankruptcy is where you make payments on your debt. It’s also a way to catch up on late payments to your car loans.  This could stop the car repossession and save your wheels. Or it can be a way to deal with the debt after car repossession before they touch your paycheck.

Car Arrearages and Chapter 13

It’s been the rule for a long time that if you were late on a car loan, bankruptcy required the entire car loan to be put into the bankruptcy and paid back in the plan. However, with some recent changes in 2019, in the Central District of California, it’s possible to propose a Chapter 13 plan that has only the car lates (or car loan arrearages).

Chapter 13 Cramdown Bankruptcy

Generally, if there’s a collateral loan, bankruptcy doesn’t change it. You need to honor the contract if you want to keep the stuff. The good news is, for every rule, there’s an exception. This is the cramdown bankruptcy, also called a chapter 13 cramdown. The cramdown bankruptcy is where in some situations, you don’t pay the entire car loan back, but only the value of the car. In lots of cases, the car has depreciated on a high-interest loan that a Chapter 13 cramdown can save thousands, even tens of thousands, of dollars.

Bankruptcy and Car Repossession

One of the areas that bankruptcy protection may help is with a car repossession. It breaks your heart. The car you had, your baby, is now gone. You wake up one day and find out that the spot you parked it in is empty. You figure it’s over. Then the debt. What happens with a bankruptcy and car repossession. Let’s find out.

My Car Was Repossessed – What Next?

It adds insult to deep injury that they make you pay money — often many thousands of dollars — after your car repo. This is a Deficiency Judgment or Deficiency Balance. It often results in a wage garnishment. This car repo debt will be eliminated by a bankruptcy.

Deficiency Balance? Car Repo Auction Fallout

They’re going to sell your car at an auction. If they get less than you owe as the winning bid (which is usually the case), you’ll owe the rest. That is the deficiency balance referred to above. It usually is somewhere between $3,000 and $10,000 that you still owe on a car you don’t have any more. Most people don’t have that kind of money, so they usually sue you in court . You owe the balance debt, so they usually win. That means they get a judgment against you.

This turns into a wage garnishment where they take part of your paycheck. This is what happens if you do nothing and bury your head in the sand, pretending that just because you gave the car back in a voluntary car repossession, everything is ok.

Do Something – The Problem Isn’t Gone

The number one mistake people who have had a car repo is giving the car back and pretending it’s all over. Months go by and they think life has returned to normal. Wrong! You have a lawsuit in your future, and the longer you put it off, the more penalties and interest are going to hit you until you deal with it. If you pretend it’s over, you’re fooling yourself. If you wait too long, we can’t help you because maybe you don’t have time or money to stop the garnishment. Then you are stuck letting them suck your paycheck every pay period until you’ve paid the whole thing.

Contact Us Now

If you lost a car to repo, or you fear you might, don’t test them. Don’t wait for the lawsuit and them to garnish your paycheck. Do something now and take care of it before you lull yourself into a false sense of security and end up paying the price.

And if you have a car and want to file bankruptcy and found this “bankruptcy and cars” article helpful, maybe you should let this bankruptcy attorney be your personal guide for the entire process.

    Hale Andrew Antico was chosen by his bankruptcy attorney peers to be President of SoCal's largest consumer debtors lawyers' association two times, and has been voted best Santa Clarita bankruptcy attorney by our SCV neighbors four times. Arrange a no-obligation consultation by Zoom or in-person to learn your options for a fresh start.

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