Chapter 7 vs. Chapter 13 and Your Vehicle Loan
Feb. 13, 2017
A Chapter 7 case makes sense if you want to keep your vehicle and don’t need much help doing so. Chapter 13 provides much more help.
In deciding between Chapter 7 and Chapter 13, for your vehicle loan is concerned, think about the two sentences above.
First, you don’t need as much help keeping your vehicle if you are current on its loan payments. Chapter 7 will “discharge”—legally write off—all or most of your other debts. That should make keeping current on and paying off your vehicle loan so much easier.
Second, if you are behind you are on your vehicle loan, don’t have a way to catch up quickly, and/or your vehicle is not worth what you owe on it, you could probably use the extra help that a Chapter 13 case would give you.
Today’s blog post is about how Chapter 7 and Chapter 13 each handle debts secured by your vehicle.
Chapter 7—Focused Help for Your Vehicle
So, if you’ve managed to keep current on your car or truck loan, consider Chapter 7.
If you have fallen just a month or maybe two behind, Chapter 7 may still work for you. You will get a short break from the risk of the vehicle getting repossessed. But then you’ll need to get current on loan quickly—within a month or two of filing the bankruptcy case. So a Chapter 7 case is appropriate if it will improve your cash flow enough that you’ll be able to get current that quickly—and then pay consistently after that.
Whether you are current or not, Chapter 7 may enable you to save lots of money by “redeeming” your vehicle. If your vehicle is worth less than you owe on it, you can pay the amount of the vehicle’s value in a lump sum to the creditor. Then your lender must give you the vehicle free and clear. You don’t have any way of getting the fair market value amount of money needed to redeem? You may be able to get a loan specifically for that purpose from a redemption loan lender. Although the interest rate may be relatively high, redemption may still save you lots of money if the new amount financed is thousands of dollars less than your original loan.
Whether or not you are current on your vehicle loan, consider Chapter 7 if you’ve decided to surrender your vehicle. Chapter 7 will get you out of a financially bad vehicle loan. It will permanently discharge any “deficiency balance.” That’s the difference between how much you would owe and how much your vehicle would be sold for after surrender. That debt often amounts to thousands of dollars, so discharging that in bankruptcy often makes sense.
Chapter 13—Much More Help in Keeping Your Vehicle
Chapter 13 gives you much more time than Chapter 7 does to catch up on your vehicle loan payments. Instead of just a month or two to get current, Chapter 13 can give you years to do so. You and your lawyer put together a “Chapter 13 plan.” That payment plan usually requires you to make a single monthly plan payment to the Chapter 13 trustee. A portion of that monthly payment is earmarked for paying off the vehicle loan arrearage. In the meantime you and your vehicle are protected from repossession and any other collection action. After some input from the trustee and sometimes from your creditors, the bankruptcy judge approves the plan. Then you need to consistently make the plan payments, keep insurance current, and fulfill any other requirements under the plan.
Under Chapter 13, you may also get the benefit of a “cramdown” of your vehicle loan. You qualify if you got the loan more than two and a half years earlier, and you owe more than the vehicle is worth. “Cramdown” means a forced rewriting of the loan to your benefit. It usually reduces the monthly payments (often significantly). It reduces the amount you must definitely pay down to the fair market value of the vehicle. It often reduces the interest rate as well. The end result is that you often pay thousands of dollars less for your car or truck, and then own it free and clear. (“Cramdown” is not possible in a Chapter 7 case.)
Considering how much you can save, if you qualify for “cramdown” think about Chapter 13 even if you are current on your vehicle loan. Certainly if you are on the fence about which type of case to file, the benefits of a “cramdown” can swing the decision in favor of Chapter 13.
This blog post assumes you don’t have any or too much equity in your vehicle. Whatever equity you may have is usually fully protected by a property “exemption.” But if your vehicle has too much equity, that may well be another reason to file a Chapter 13 case. Chapter 13 can protect your equity in ways that Chapter 7 can’t. That’s beyond the scope of this post so if you have equity in your vehicle discuss this with your lawyer.