Stopping a Repossession by Filing Bankruptcy

If you can't pay a secured loan, can you prevent your property from being repossessed by filing bankruptcy?

Yes--but unless you can make arrangements to keep paying, it's only a "stay of execution," not a pardon. That is, if you cannot pay the debt going foward, the lender will be able to repossess (or foreclose, in the case of real estate).

Stay of Collections

When bankruptcy is filed, all collections efforts are automatically "stayed," or put in abeyance, for a time. This creates "breathing room" for the bankruptcy process. Unfortunately, a "stay" is only a "delay" when it comes to secured debt, such as mortgages or most car loans.

What Happens in a Chapter 7 Case

Chapter 7 is liquidation bankruptcy; some of the debtor's economically valuable assets will be liquidated to pay off creditors. Creditors are paid as much as possible; then the remaining debt(s) are discharged, or canceled. At least, that's what happens for unsecured debt, like credit card debt. Secured debt--where property is serving as collateral--works differently. The lender still retains its security interest in the property, which means that if the debtor cannot or will not pay the debt, the lender will be allowed to take the property: repossess or foreclose on it.

What Happens in a Chapter 13 Case

Chapter 13 is "debt adjustment": a court-ordered plan (or budget) is determined, under which the debtor will pay creditors as much as he or she can for several years, after which, the remaining debt(s) are discharged. Since Chapter 13 is about paying over time, it does not absolve the debtor of the obligation to pay secured debts. It will provide the debtor with the opportunity to catch up on past due payments, but going forward in time, if the debtor can't or won't pay, the lender can foreclose or repossess.

Bankruptcy Must be Filed Before Foreclosure or Repossession

The stay on collections efforts is not retroactive. If a lender completed foreclosure or repossession prior to bankruptcy being filed, the filing does not reverse or undo that. Therefore, debtors must file before their property is successfully taken.

Talk to a Bankruptcy Attorney

Bankruptcy is very powerful, but it can also be very complex. Deciding on whether bankruptcy is the right option, and, if so, which type of bankruptcy, completing the paperwork accurately and quickly (remember: the debtor may be in a race to file before repossession or foreclosure), and making sure that the filing is done properly, to give the debtor every advantage, are all things with which an attorney can help.

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