Chapter 13 gives you a number of tools to help you deal with your vehicle loan.
Chapter 7 vs. Chapter 13 in General
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” give you two very different ways of attacking your debts. This includes your vehicle loan.
Chapter 7 gets rid of most debts within about 100 days so that you can have a quick fresh start. The biggest benefit for your vehicle loan is you’ll be better able to afford it. That assumes you want to keep your vehicle. It also assumes that after writing off all or most of your other debts you are willing and able to make the regular payments. It also assumes that you are current, or close enough to being current that you can catch up quickly.
Chapter 13 is a very different option. It involves a flexible payment plan. Chapter 13 is especially helpful with debts you can’t or don’t want to write off, or “discharge.” Debts that you can’t discharge include recent income taxes, all child and spousal support, and many student loans, for example. Debts that you may not want to discharge include secured debts in which you want to keep the collateral.
Other than your home (which we covered in the last blog post), your vehicle loan is likely your biggest secured debt. Chapter 13 protects you for three to five years to deal with those debts, including your vehicle loan, that you can’t or don’t want to discharge. At the end of your Chapter 13 case, you get a discharge of the debts that you didn’t pay in full, catch up on and/or partially pay. So if Chapter 7 doesn’t give you enough help with your vehicle loan , Chapter 13 is often the better option.
Saving Your Vehicle
Chapter 13 stops a vehicle repossession if your lender has put one into motion. Filing a Chapter 13 case can also stop a repo from being ordered if you are on the brink of that happening. This protection—the “automatic stay”—starts out the same as in a Chapter 7 case. But the difference is in how long the protection lasts. In Chapter 7 at most it lasts 3-4 months. Under Chapter 13 it can last as long as 5 years. (In both types of cases the lender can file a motion for “relief from the automatic stay” to start or re-start a repossession under certain circumstances.)
Assuming you’re behind on your monthly payments, you may or may not even need to catch up the missed payments under Chapter 13. If you do need to, you have as much as 3 to 5 years to catch up. That’s in huge contrast to having only a few weeks to catch up under Chapter 7. Having such a long time to catch up makes it easier and more likely that you actually do end up catching up and keeping your vehicle.
You may not need to catch up at all if you qualify for a “cramdown.” You qualify if your vehicle loan is more than two and half years old when you file bankruptcy. Then you essentially get to re-write your vehicle loan, and you only have to start making new payments going forward.
You get other benefits if you qualify for “cramdown” and your vehicle is worth less than the amount of your debt on it. Under Chapter 7 you are virtually always stuck with whatever monthly payment was in your original contract. It’s extremely rare that your lender would allow any renegotiation of that. But under “cramdown” your monthly payment is usually reduced. Sometimes it is significantly reduced.
Same thing with the interest rate. Under Chapter 7 you’re stuck with whatever interest rate is in your original contract. But under Chapter 13—again assuming your vehicle is worth less than your debt on it—the interest rate could be reduced.
This flexibility with your vehicle loan often enables you to deal better with other important debts. For example if you are also behind on a mortgage or child/spousal support obligation, you’d likely be able to catch up on those more quickly.
This flexibility also extends to changes in your circumstances in the future. Under Chapter 7 it’s basically a take-it-or-leave-it proposition. Assuming you keep your vehicle, you’re required to “reaffirm” its loan. That means there’s no flexibility on the monthly payments down the line. However, under Chapter 13 if your circumstances change you can often amend your payment plan, and in doing so may be able to reduce the vehicle payments.
Under Chapter 7 you’re 100% liable on the loan no matter what happens in the future. If you can’t make the payments months or years later, the lender will repossess the vehicle. Then you’ll usually owe a “deficiency balance”—the loan balance minus the proceeds of sale at an auto auction. In contrast, under Chapter 13 if your circumstances really worsen so that even an amended plan wouldn’t help, you can usually convert the case into a Chapter 7 one. Then instead of owing any potential “deficiency balance,” that would be discharged and you’d owe nothing on it.