Your Vehicle in Bankruptcy
by Michael Sosna
Bankruptcy provides a number of options for people who want to keep their cars(s) and/or truck(s). Because of the difference between Chapter 7 (no payments to a Trustee with a discharge of debts in 3 to 4 months) and Chapter 13 (payments to a Trustee with a discharge of debts in 3 to 5 years), the options are different.
In a Chapter 7 bankruptcy, people are entitled to exempt, or protect, a certain amount of the equity or value in their motor vehicles. In most cases, people are able to exempt all their equity so that the Trustee, on behalf of creditors, cannot take the vehicles and they are entitled to keep their vehicles.
If you have a car or truck loan and you are current in your payments, Chapter 7 allows you to keep your vehicle as long as you agree to continue to make your regular payments pursuant to your loan contract. You are not allowed in bankruptcy to discharge – wipe out – the vehicle loan and keep the vehicle; if the is car or truck is the security for a loan, you must pay the loan to keep the vehicle.
If you have a car or truck loan and no longer wish to keep making those payments, you can surrender, or give up, the vehicle and discharge the loan balance, meaning the creditor/loan company can never try to collect that balance from you.
If you have a vehicle or truck loan and are behind in your payments, and want to keep your vehicle, in most instances you do not want to file a Chapter 7 bankruptcy because there is no payment plan to allow you to catch up the arrears. In those situations, you will want to file a Chapter 13 bankruptcy instead.
In a Chapter 13 bankruptcy you are also allowed to exempt or protect a certain amount of your equity in your car or truck. In most instances, people are able to exempt all of their equity and so the ownership of vehicle(s) doesn’t increase the amount of the Plan payment.
However, if there is a motor vehicle loan, a Chapter 13 may allow you to lower the monthly payment of that obligation. If you are current in the vehicle loan payments, you can continue to pay the loan company directly at the contractual rate. However, it is often cheaper to pay that loan through the Plan. For example, if you have only 2 years left to pay under the vehicle loan contract, but you stretch that payment over 5 years in a Chapter 13, you effectively lower the monthly amount you pay on that loan. Usually, the bankruptcy interest rate is lower than the loan interest rate, which may also lower the payment if paid through the bankruptcy Trustee.
If you are behind in your vehicle payment, a Chapter 13 allows you to propose a plan to keep your vehicle. Once you file your bankruptcy case, the creditor/loan company is prohibited from taking any action against you, including repossession. In your bankruptcy you can either 1) continue to make your regular installment payments directly to the loan company and catch up the arrears in equal payments over 36 to 60 months or 2) you can pay the entire loan balance in your Chapter 13 Plan over that time period – whichever is least expensive. As long as you make your Chapter 13 Plan payment on time, the creditor can take no action against you. At the end of your case you will either have paid off the loan, if paying the entire debt through your Plan, or be current in your payments, if you were only paying the arrears through the Plan.