Bankruptcy protects your vehicle and helps you deal with your vehicle’s debt in many ways. Here are 13 of them.
1. Is your vehicle free and clear of any debt? That means it could be exposed to seizure by creditors for payment of their debts. Protect your free and clear vehicle(s) by filing bankruptcy and applying the applicable state or federal vehicle exemption.
2. What if your vehicle is worth more or has more equity than the exemption provides? You can likely protect that extra value or equity by paying off that extra amount in monthly payments to your Chapter 7 trustee. In the right situations that money would just go to another one of your important debts. That debt is likely one you would have to pay anyway, such as recent income taxes or child/spousal support arrearage.
3. You can also protect such extra value or equity through a Chapter 13 case. Similarly, the money you pay to protect the vehicle may go to debts that you must pay anyway. Or you may be required to pay the money because of other requirements (because of your budget, for example). As a result you may succeed in protect your vehicle without really paying substantially more to do so.
4. What if you do owe a vehicle and can’t afford your vehicle loan payments? Eliminate all or most of your other debts through bankruptcy so you can afford those payments.
5. And what if you are behind on your vehicle loan payments? You can immediately stop your vehicle from being repossessed by filing either a Chapter 7 or Chapter 13 case.
6. What if you’re not far behind on your loan? If you could catch up within a month or two after eliminating all or most of your other debts, file a Chapter 7 case.
7. Do you need more time? Get as much as 5 years to catch up by filing an “adjustment of debts” Chapter 13 case. Your vehicle would be protected from repossession as long as you follow a payment plan. That’s a court-approved plan that you and your bankruptcy lawyer propose based on how much you can afford.
8. Do you owe more on your vehicle than it’s worth? Under Chapter 7 pay your vehicle lender the fair market value of the vehicle to “redeem” it at that price. If you can find the money to do this you’d then own your vehicle free and clear.
9. What if you cannot come up with the lump sum needed to “redeem”? You may qualify for a redemption loan. That’s a loan from a new lender in the amount of the value of the vehicle. That allows you to “redeem” when can’t get the money elsewhere. The interest rate on a redemption loan is likely high but potentially still very worthwhile if your vehicle is worth much less than the amount you owe on it.
10. Is your vehicle loan is more than 910 day old (about 2 and half years). Do you owe more on your vehicle than it’s worth? Do a “cramdown” on that loan. That effectively re-writes the loan under very favorable terms. You reduce the secured debt to the vehicle’s fair market value. Usually you can also reduce the interest rate, and stretch the payments out over a longer period. All these almost always result in a significantly reduced monthly payment. In many cases you pay little or nothing on the unsecured portion of the loan. That’s the dollar amount beyond the vehicle’s value. The end result is a savings of many thousands of dollars on your vehicle loan.
11. Do you have unpaid income taxes? Protect your vehicle from seizure by the IRS or state tax agency for those taxes. Protect them from tax liens. Discharge (legally write off) the taxes with a Chapter 7 case. Or if your taxes don’t qualify for discharge, pay them through a Chapter 13 case while your vehicle is protected.
12. Are you behind in child or spousal support payments? Chapter 13 gives you extraordinary powers. Prevent your state or local child/spousal support enforcement agency from seizing your vehicle and/or suspending your personal or commercial driver’s license.
13. What if you decide to surrender the vehicle to your lender? Avoid owing a deficiency balance. That’s the often surprisingly large amount still owed after the lender sells your repossessed vehicle. Often repo’d vehicles are sold for much less than you’d think at an auto auction. Then a bunch of extra fees are added to your account. As a result of all this, the “deficiency balance” is often an unexpectedly high amount. Your lender often doesn’t waste time suing you for it. Either a Chapter 7 or 13 case would almost always discharge this deficiency balance.