When someone finances the purchase of a motor vehicle, the vehicle itself serves as collateral for the loan. The buyer could, therefore, lose possession of it at any point if they fall too far behind on their payments.
Depending on the terms of someone’s loan, it might take only one or two missed payments for a lender to initiate repossession efforts. Unlike foreclosure, where a lender takes possession of real property due to someone defaulting on a mortgage, a repossession does not automatically involve advanced warning. Lenders can recover a vehicle without sending prior notice to its owner. Depending on the terms of the loan, someone could be at risk of repossession after just a month or two of financial challenges. For many people, bankruptcy is the best way to avoid vehicle repossession.
Bankruptcy provides an automatic stay
The same day that someone files for bankruptcy, the courts send out notice to the credit bureaus. Most major lending institutions will receive same-day notice of someone’s bankruptcy. This system allows the company to avoid violating the automatic stay and to close or freeze lines of credit to avoid financial losses.
Even if the company was about to send a repossession order out to a specialist, the company usually needs to cease such collection efforts after learning of a borrower’s bankruptcy filing. If they attempt to repossess the vehicle after someone files for bankruptcy, that violation of the automatic stay could give the person who filed an opportunity to reclaim the vehicle later.
Bankruptcy provides an incentive to negotiate with a borrower
When someone is falling behind on a vehicle loan, lenders often demand that they make all of the missed payments immediately to prevent repossession. Someone who files for bankruptcy, particularly if they file for Chapter 13 bankruptcy, may be able to renegotiate some aspects of their loan with the lender. Decreasing the monthly payment or moving the missed payments to the end of the loan could both be options for someone who wants to retain their vehicle despite falling behind on payments.
Filing for personal bankruptcy can be one of the most effective ways for an individual to avoid vehicle repossession and other aggressive debt collection efforts after their finances have become unmanageable and they’ve started to miss payment deadlines as a result.