Learn how to maintain your automobile in Chapter 13 bankruptcy, decrease your car loan, and prevent repossession.
Chapter 13 bankruptcy provides advantages that may allow you to retain your automobile. If you fall behind on your vehicle loan payments, your Chapter 13 plan might help you catch up. Even better, if you owe more on your automobile loan than it is worth, you may be able to lower the amount due.
However, maintaining a car in Chapter 13 bankruptcy is not always possible, and you may not want to. For example, it may not be able to preserve it if:
You have a lot of nonexempt automotive equity (equity that a bankruptcy exemption cannot protect), your car payment is very expensive, or you’re making payments on a second vehicle that you don’t need.
If you’re thinking about filing for Chapter 7, you should read about Chapter 7 bankruptcy and your automobile.
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How Chapter 13 Can Assist You With a Vehicle
Chapter 13 bankruptcy has various advantages to assist you in keeping or getting out from under your property. Here are a handful that pertain to automobiles.
You have the ability to prevent repossession. When you file for Chapter 13 bankruptcy, most creditors are required to halt collection attempts against you due to an order known as the “automatic stay.” If you have already filed for Chapter 13 bankruptcy, your auto lender cannot seize it. You may even be able to get your automobile back if the lender seized it soon before you filed for Chapter 13. Learn more about vehicle repossessions and Chapter 13 bankruptcy.
You may return an automobile to the bank. If you can’t afford your vehicle payment, or if you’re making payments on a car that’s unreliable or requires expensive maintenance, it may be time to let it go. You may get out of the payment under Chapter 13 by surrendering the automobile.
You can make up the difference on your automobile payment. Provided you fall behind on your vehicle loan or lease and file for Chapter 13 bankruptcy, you may be able to retain your automobile if you pay the amount owed via your repayment plan while continuing to make your monthly car payments. If you remain current on your auto loan and payments schedule, the lender cannot repossess your vehicle.
You may be able to have your auto loan reduced. If the amount of your automobile loan exceeds the value of your car, which is frequent due to automotive depreciation, you may be eligible to lower or “cram down” your loan amount in Chapter 13 bankruptcy. Essentially, you may lower your debt to match the car’s worth. Whatever is left becomes unsecured debt and is handled similarly to the rest of your unsecured obligations. The caveat is that your jurisdiction may have a different law, such as requiring you to have purchased the automobile more than two and a half years before filing for bankruptcy. Learn more about bankruptcy vehicle loan cramdowns.
What You’ll Need to Do in Chapter 13: Keeping a Vehicle
In most cases, you may retain your property while filing for Chapter 13 bankruptcy, but not always. You’ll have to demonstrate that you can afford to pay the amount your creditors are owed under a repayment plan, which may be costly.
In particular, in addition to paying your monthly living expenditures, such as your mortgage and auto payments, you must pay the larger of the following via a three- to five-year repayment plan toward your unsecured debts, such as credit card balances, outstanding utility payments, and medical bills:
your monthly disposable income (the amount left over after paying authorized expenses) or the value of any nonexempt property you want to maintain but cannot protect with a bankruptcy exemption.
A creditor who does not believe they will get the whole amount owing may oppose to your strategy. Here are three things you must demonstrate.
You are paying for any excess vehicle equity.
In bankruptcy, you are permitted to retain, or “exempt,” a limited amount of property. You must pay the fair market value of any nonexempt property you possess. Because your plan must pay your unsecured creditors an amount equivalent to the value of your nonexempt property, having a large amount of nonexempt equity in your automobile or other property may cause your plan payment to increase.
Example. Assume your state exemptions enable you to retain $5,000 in car equity. If you have $15,000 in car equity, you must pay $10,000 to unsecured creditors as part of your bankruptcy plan. Of course, any additional nonexempt property equity must be considered, and if you have a considerable amount, you may be unable to repay the mandatory Chapter 13 plan payment. If your disposable income exceeds the nonexempt equity amount, you must pay the difference.
Get more information on the Chapter 13 repayment plan.
You can demonstrate that your car expenses are reasonable.
In a Chapter 13 bankruptcy, your repayment plan must demonstrate that all of your disposable income—that is, your income less your required living expenses—is utilized to settle your unsecured obligations. Only costs reasonably essential for your and your dependents’ maintenance may be deducted when calculating your disposable income.
Because your creditors want as much as possible, they will protest if it looks that you are spending money excessively. A creditor, for example, can complain, arguing you’re making an overly high auto payment or paying for a second car you don’t need instead of paying creditors from your disposable income.
It is very unusual for a judge to rule that a large luxury automobile payment is not fair or that you only need one car to go to work. In any situation, you may not be able to include the automobile payment when calculating your disposable income.
Instead, you’d only be allowed to deduct expenses associated with one lower-priced vehicle. When can you maintain two automobiles in Chapter 13 bankruptcy?
Proving You Can Afford the Payment in Chapter 13 and Auto Loans
If you have a financed car, you must also demonstrate your ability to make the monthly payment as well as any “arrearages” or late sums via your plan. This is in addition to any other payments you must make in Chapter 13 bankruptcy.
Find out more about car loans in bankruptcy.
What Happens If You Pay Off Your Car in Chapter 13?
If you pay off your automobile under your Chapter 13 plan, it will be yours. You will own it outright.
Paying off your automobile in Chapter 13 is not uncommon, and it is probable if the remaining time on your car loan is less than five years. One of the advantages of filing for Chapter 13 bankruptcy is that you will emerge financially unscathed.
Most individuals owe nothing except long-term debt, such as a mortgage or a student loan. Following the completion of your payments, everything else is totally paid or wiped away by the bankruptcy discharge.