Behind on Your Vehicle Payments?

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Can bankruptcy stop car repossession in Virginia? Yes. If a bankruptcy case is filed before the lender repossesses the vehicle, the automatic stay will ordinarily prevent the lender from taking it while the stay remains in effect. Chapter 13 can also provide a way to deal with missed payments and continue paying for the vehicle through a court-supervised repayment plan. The Bankruptcy Code generally stays efforts to obtain possession of estate property or collect prepetition debts once a case is filed.

For many people, transportation is essential to keeping a job, taking children to school or childcare, attending medical appointments, and earning the income needed to fund a Chapter 13 plan. Losing a vehicle can therefore turn a financial problem into an immediate crisis.

If you are behind on a vehicle loan and want to keep the car, addressing the problem before repossession is usually easier than trying to recover the vehicle afterward.

How Does Chapter 13 Handle a Car Loan?

Chapter 13 can allow a debtor to keep a financed vehicle while paying the lender through the bankruptcy plan. Rather than having to immediately pay all missed payments to prevent repossession, the loan can often be addressed over the life of the Chapter 13 case.

Depending on the loan and the circumstances, Chapter 13 may also allow changes to the way the debt is repaid, including the applicable interest rate and payment structure. In some cases, the amount treated as secured may depend on the value of the vehicle, although special rules apply to certain recently purchased vehicles. The Bankruptcy Code provides specific treatment for secured claims paid through a Chapter 13 plan.

The important point for most clients is simpler: Chapter 13 can often turn an unaffordable delinquent car loan into a payment arrangement that allows the debtor to keep the vehicle.

What If the Vehicle Has Already Been Repossessed?

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A repossession before bankruptcy does not necessarily mean the vehicle is gone for good.

In our experience handling Chapter 13 cases in the Richmond area, lenders will often return a vehicle that was repossessed before the bankruptcy filing when the debtor proposes to retain the vehicle and pay the lender through the Chapter 13 plan.

The process is not always instantaneous. A lender may require us to provide proof of insurance, a copy of the filed Chapter 13 plan, or other information showing how its claim will be treated before agreeing to release the vehicle. Some lenders are easier to work with than others.

The important thing is to act before the vehicle is sold.

Virginia law gives a debtor a right to redeem repossessed collateral before the lender has disposed of it, entered into a contract to dispose of it, or accepted it in satisfaction of the debt.

Does the Lender Have to Give the Car Back Immediately?

Not automatically.

In City of Chicago v. Fulton, the U.S. Supreme Court held that a creditor’s mere retention of property that it possessed before the bankruptcy filing does not, by itself, violate the automatic stay provision of §362(a)(3). In other words, filing Chapter 13 does not necessarily create an automatic obligation for the lender to hand over a previously repossessed vehicle without further action.

That does not mean a repossessed vehicle cannot be recovered in Chapter 13.

Section 542 of the Bankruptcy Code contains separate turnover provisions requiring certain property of the bankruptcy estate to be delivered to the estate, subject to the requirements and protections contained in the Code.

As a practical matter, we are often able to obtain return of a repossessed vehicle without litigating the issue when the debtor is keeping the vehicle, maintaining insurance, and proposing to pay the lender through the Chapter 13 plan.

If the lender refuses to return the vehicle voluntarily, it may be necessary to ask the Bankruptcy Court to order turnover. Whether turnover will be granted depends on the circumstances of the particular case. The fact that a vehicle is necessary for the debtor to work, earn income, and successfully fund the Chapter 13 plan can be particularly important.

Why Filing Before Repossession Is Still Better

Even though a repossessed vehicle may be recoverable in Chapter 13, filing before the tow truck arrives is much easier.

Once the bankruptcy is filed, the automatic stay ordinarily prevents the lender from proceeding with repossession. That avoids storage charges, repossession expenses, delays in recovering the vehicle, and the practical headache of being without transportation.

It also avoids having to negotiate with the lender—or potentially litigate in Bankruptcy Court—to regain possession.

If you know repossession is imminent, do not wait for the lender to take the vehicle before seeking advice.

What If the Lender Has Already Scheduled the Vehicle for Sale?

Time becomes especially important once a vehicle has been repossessed.

Under Virginia law, a debtor generally retains redemption rights until the secured creditor has disposed of the collateral or entered into a contract for its disposition.

Once the vehicle has actually been sold, the situation becomes considerably more difficult and Chapter 13 generally cannot simply undo a completed sale and recover the car.

If your vehicle has already been repossessed, contact a bankruptcy attorney immediately and provide any repossession or sale notices you have received.

What If the Vehicle Has an Electronic Disabling Device?

Some auto lenders use starter-interrupt or other electronic devices that can prevent a borrower from operating a vehicle after default.

If a debtor files Chapter 13 and proposes to retain and pay for the vehicle through the plan, we will work with the lender concerning restoration of the debtor’s ability to use the vehicle. As with physical repossession, the lender may require proof of insurance and information concerning its treatment under the Chapter 13 plan.

If the lender will not cooperate voluntarily, further court action may be necessary depending on the circumstances.

Do You Need Insurance Before a Repossessed Car Is Returned?

Yes—maintaining appropriate insurance is extremely important.

A lender has a secured interest in the vehicle and is entitled to protection of that collateral. When we are attempting to recover a vehicle that was repossessed before Chapter 13, one of the first things the lender will often want is proof that the debtor has the required insurance coverage in place.

If your car has been repossessed and you want it returned, be prepared to provide current proof of insurance promptly.

Can Chapter 13 Lower the Interest Rate on a Car Loan?

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In many Chapter 13 cases, the interest rate paid on a vehicle loan through the plan does not have to remain identical to the contractual interest rate.

That can be particularly helpful when a debtor financed a vehicle at a very high rate before filing bankruptcy.

The treatment of the principal balance is more complicated. Depending on when the vehicle was purchased, how the loan was incurred, the vehicle’s value, and other circumstances, Chapter 13 may sometimes allow an undersecured vehicle claim to be divided between secured and unsecured portions. Other vehicle loans—particularly certain purchase-money loans incurred relatively recently before bankruptcy—receive different treatment.

You do not need to determine those rules before calling us. We review the loan, purchase date, payoff, vehicle value, and proposed Chapter 13 treatment as part of preparing the case.

Chapter 7 vs. Chapter 13 When You Want to Keep a Car

Both Chapter 7 and Chapter 13 generally create an automatic stay when the bankruptcy case is filed, so either chapter can stop a repossession that has not yet occurred, at least while the stay remains effective.

But Chapter 7 ordinarily does not provide the same long-term mechanism for curing a delinquent vehicle loan.

A Chapter 7 debtor who wants to keep a financed vehicle generally must deal with the lender and the secured debt through options such as remaining current, reaffirmation where appropriate, redemption, or another agreement with the creditor.

Chapter 13 is generally much more useful when someone is already behind on the loan, needs time to pay the debt, or is trying to recover a vehicle that was repossessed shortly before filing.

What Should You Do If Your Car Is About to Be Repossessed?

If possible, contact us before the repossession occurs.

Helpful information includes:

• the name of the vehicle lender;
• the approximate loan balance;
• the regular monthly payment;
• how far behind you are;
• the year, make, and model of the vehicle;
• whether the vehicle has already been repossessed;
• any notice concerning an upcoming sale;
• your current insurance information; and
• information about your household income and other debts.

If the vehicle has already been taken, tell us when it was repossessed and send us any paperwork immediately. There can be a meaningful difference between a vehicle sitting in a repossession lot and one that has already been sold.

Talk to a Richmond Bankruptcy Attorney Before Your Vehicle Is Sold

If you are wondering whether bankruptcy can stop car repossession in Virginia, the answer is ordinarily yes when the case is filed before repossession, and Chapter 13 may also provide a way to recover a vehicle that was repossessed shortly before filing.

In the Richmond area, we regularly work with vehicle lenders to arrange return of repossessed vehicles when the debtor intends to keep the vehicle and pay for it through the Chapter 13 plan. That process may require proof of insurance, submission of the proposed plan, and additional communication with the lender, and return is not guaranteed in every case.

Kane & Papa represents individuals throughout the Richmond area in Chapter 7 and Chapter 13 bankruptcy cases. If your car is at risk of repossession or has already been taken, contact us as soon as possible so we can determine what options remain before the lender sells the vehicle.