When a debtor files a bankruptcy case debt collectors are required to stop all attempts to collect debt by federal law. The mechanism that stops debt collection in bankruptcy is called the automatic stay. This bankruptcy tool is especially important if you are behind on your car payments and in danger of having your vehicle repossessed. The automatic stay will prevent the vehicle from being repossessed by the creditor and in some cases may even require a creditor to return a vehicle that was repossessed prior to the filing of the bankruptcy case.
However, stopping vehicle repossession is not the only result of filing a Chapter 13 case. This type of bankruptcy case also provides a means for the debtor to pay off the claim secured by the vehicle so that future repossession can be avoided. Debtors can often repay these claims in their Chapter 13 reorganization plans at a much lower interest rate than what would be due under the original contract. The plan may also allow them to lengthen the amount of time available to them to repay the debt and reduce the amount that has to be paid to satisfy the claim to an amount equal to the value of the collateral. This is referred to as cramming down the claim and is available to debtors who financed the vehicle more than 910 days before the bankruptcy case is filed.
Chapter 13 plans are subject to court approval. They generally last 36 to 60 months and require that the debtor make a payment to a trustee each month. The order confirming the plan usually states that once the car creditor’s claim has been satisfied under the terms of the plan that they will turn over title to the vehicle. This usually allows the debtor to obtain the vehicle’s title before the end of the bankruptcy case.