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How Chapter 13 Helps If You Are Behind on Your Vehicle Loan or Owe More on That Loan than the Vehicle is Worth

Nov. 21, 2012

If you’re a few months behind on your vehicle loan, Chapter 13 gives you much more leverage and protection than Chapter 7. And Chapter 13 may lower your monthly vehicle loan payment and save you thousands of dollars on it in the long run.

In our last blog we discussed one scenario in which your vehicle is worth more or has more equity than the $3,000 vehicle exemption (or $6,000 in some marital situations). We showed how your vehicle could be better protected under Chapter 13 than Chapter 7 in that scenario. In this blog we talk about a second and a third scenario where Chapter 13 could well help you more: if you’re further behind on your vehicle loan than you could cure in a month or two, and if your vehicle is significantly “under water”—you owe much more than it’s worth.

Scenario #2: Behind on Your Vehicle Loan

Two blogs ago we wrote about hanging onto your vehicle in a Chapter 7 case is you would be able to catch up on your back payments within a month or two of filing your case. Most vehicle lenders insist on that timetable. So regardless how many dollars behind you are, if you can’t get the money to catch up that quickly, and you really need to keep that vehicle, then you have to consider the Chapter 13 alternative. (NOTE: Some local vehicle creditors may be more flexible on the timing in Chapter 7—we’ll tell you if yours is one of those rare ones.)

Generally speaking, Chapter 13 will allow you to pay off the vehicle loan over many months. The Chapter 13 Trustee will make monthly payments to the lender from the money you are paying the Trustee as your monthly Chapter 13 plan payment, and you no longer have to make separate vehicle loan payments to the lender. And you have up to 5 years to pay off the loan. Chapter 13 also helps bring the cost of that loan down for you if you have a high or even moderate interest rate, by likely reducing that rate, down to about 4% currently. As long as you are making your payments to the Trustee, the lender does not have the right to repossess your vehicle.

In some cases, you do not ever have to catch up on your missed payments. That ties into the next scenario.

Scenario #3: Vehicle Worth Less Than You Owe on It

IF your vehicle is worth less than the debt against it, under Chapter 7 it’s almost always “take it or leave it”—you have only two choices: keep the vehicle and owe the whole debt, or surrender the vehicle to the creditor and owe nothing. (Again, certain rare creditors might negotiate a lower balance, and we’ll tell you if you happen to have one of those.)

But under Chapter 13, you may have a third, much more attractive alternative. IF you owe more on the vehicle loan than the vehicle is worth, AND you got the loan more than 910 days (about 2 and a half years) before the Chapter 13 is filed, then you can do a “cramdown”—re-write the loan in your Chapter 13 plan to reduce the balance to be paid down to the value of the vehicle. In addition you could likely reduce the interest rate as mentioned above, and, if you need to do so, further reduce the monthly payment by stretching it out over a longer period (up to the 5-year Chapter 13 maximum length).

In a “cramdown,” the remaining portion of the debt—the part beyond the value of the vehicle—is lumped in with the rest of your unsecured debts, to receive a pro-rated share of whatever money you are paying towards them, which is often not much. Sometime these debts, including the unsecured portion of your vehicle loan, get paid nothing at all through a Chapter 13 plan. In any event, the vehicle’s unsecured portion usually does not increase what you need to pay into your plan—it just reduces the amounts paid to the rest of that pool of debts.

In weighing the Chapter 7 and 13 options, be aware that the cost of doing a Chapter 13 case is almost always much higher. This includes dollar costs like the attorney fees and the Chapter 13 trustee fees (which will range from 3-10% of every dollar you pay through the plan). It also includes intangible costs like the length of a Chapter 13 compared to Chapter 7, and the likelihood of completing each one successfully. A lot needs to be taken in consideration. Our job is to help you decide the best way to go. So we will help you weigh all these factors so you find out what makes more sense in your own unique circumstances.