Is It Possible to Avoid Repossession by Filing a Chapter 13 Bankruptcy?

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

, - September 3, 2019

When you file a Chapter 13 bankruptcy, an automatic stay is activated which prevents a repossession from occurring. However, you still need to pay the car loan, and filing for bankruptcy isn’t the best way to avoid repossession. We’ll describe your options for an auto loan during Chapter 13 bankruptcy, and the additional options you have that don’t involve bankruptcy.

Chapter 13 Bankruptcy and Your Auto Loan

An automatic stay goes into effect once you file for a Chapter 13 – or a Chapter 7 – bankruptcy. This prevents most creditors from collection action, such as repossession. The automatic stay is in place during your bankruptcy, however, it’s possible it may not last long.

Once you’re in a Chapter 13 bankruptcy, you have three options to choose from with your car loan:

  1. Surrender your vehicle – If you can’t keep up with the monthly payments, you can surrender your car to the lender. This is considered a voluntary repossession, and is listed on your credit reports.
  2. Pay what you owe – You can keep your vehicle and make up any back payments through your repayment plan, in addition to the regular loan payments. There’s no repossession involved as long as you keep up with your plan payments.
  3. Cramdown the loan – It’s possible for you to reduce the loan balance to your car’s current value. This is called a cramdown, and it’s only offered in a Chapter 13 bankruptcy. Your auto loan must be more than two and a half years old in order to do this. When you cramdown, any amount over the vehicle’s current value becomes unsecured debt, and is repaid or wiped out with your other unsecured debts during the bankruptcy.

4 Options to Avoid Repossession

Like you, lenders don’t want to go through a repossession, and are willing to work with you to avoid it if possible. However, you need to reach out to your lender and let them know what your situation is and ask if they can help. Sometimes they can, and sometimes they can’t, but you won’t know until you talk to them.

Generally, a lender can give you four options to prevent a repossession that don't include bankruptcy:

  1. Refinance – If your credit has improved, you’ve been consistent with the payments, and had the loan for at least a year, you may be able to refinance and lower the monthly payment. You can do this by either extending the loan term, or qualifying for a lower interest rate.
  2. Modify loan terms – Loan modification is another option that may be offered. When you modify the loan, you can avoid repossession by adjusting your monthly payment, loan term, and possibly your interest rate.
  3. Change payment due date – Your lender may be able to adjust the payment due date if you’re struggling to make it on time each month.
  4. Deferment – If you need a temporary fix due to unforeseen circumstances, your lender may defer a payment. This means you can skip a payment and the lender adds it to the end of the loan term.

The Bottom Line

It is possible to avoid repossession if you file a Chapter 13 bankruptcy, but it shouldn’t be your first option. Reach out to your lender, let them know what’s going on, and see if they can assist you. If they can’t, at least you know what your options are during a Chapter 13 bankruptcy.

If you already filed a Chapter 13 bankruptcy and find yourself needing a new vehicle, but don’t know which dealership to work with, we can help. At CarsDirect, we match car buyers to local dealers that know how to help people in unique credit situations.

Start the process today by completing our auto loan request form online, and we'll get to work for you.

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Megan Foukes is a recent graduate from Indiana University who graduated with a bachelor’s in journalism. Megan works as a content writer for Auto Credit Express and contributes to several automotive and finance blogs.

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