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If you are considering filing for Chapter 7 bankruptcy, you might be worried about how that will affect your possessions. The good news is, car loan lenders are not allowed to repossess your car or even try to collect on your outstanding balance once you file for Chapter 7 bankruptcy. In fact, their only recourse is to get permission for repossession from the court. Here we review how it works when you file for Chapter 7 bankruptcy and how to avoid car repossession.
Once you file a Chapter 7 bankruptcy, the court creates an automatic stay. The stay stops most creditors from trying to collect on outstanding debts. This includes harassing phone calls and repossession of your car. However, as mentioned, they can obtain court permission if they still wish to proceed with repossession.
The lender can file what is called a “motion for relief from the automatic stay” with the court. The lender must prove they have the right to repossess your car. They also have to provide proof you have defaulted on the loan or consistently missed payments or were late.
If the lender’s motion for relief is granted, you’ll have about two weeks to oppose the motion. It takes another 30 days or so for the court to set up a hearing to review the motion. You then have a chance to prove the lender is in the wrong. This can include proving your payments were indeed made on time, or perhaps you had an agreement that a payment could be missed due to extenuating circumstances. You can also find evidence the motion for relief was filed incorrectly. The judge can then deny the motion if you prove it is flawed or represented incorrectly by the lender. A bankruptcy attorney can help with this process.
In some cases, the judge might decide you and the lender should come to an agreement despite the bankruptcy. For example, the lender might negotiate a new payment schedule or you might offer a solution to resolve the loan default. In the case where it is clear you haven’t made any attempts to resolve the issue, however, the judge tends to grant lenders permission for repossession.
There are two ways to avoid repossession:
Most lenders prefer either of these options, as it is the best way to recover the money they have lost.
In Illinois, there is a motor vehicle exemption for Chapter 7 bankruptcy that allows you to exempt up to $2,400 in equity for your car. You can also speak to an attorney about the option to file for Chapter 13 bankruptcy instead. This allows you to keep your vehicle whether you have exempt equity or not.