What are your options if you have feel you must keep your vehicle, but just can’t afford the monthly payments?
The Limitations of Chapter 7
A “straight bankruptcy”—Chapter 7—will almost never lower your payments or allow you to keep your vehicle for anything less than you agreed when you bought and financed the vehicle. You should expect to be stuck with the contract terms if you want to keep the vehicle.
That’s why Chapter 7 case will only help you if you would be able to do ALL of the following, after writing off your other debts:
catch up on any missed payments within a month or two after filing bankruptcy,
start making the regular monthly payment on time as of the first contractual due date after filing bankruptcy, AND
make all the monthly payments on the contract on time through the end of the contract.
Most vehicle loan lenders—especially the major national ones—are simply not willing to budge on the terms of payment:
If you can’t catch up on any missed payments fast enough, you generally cannot keep the vehicle.
If during the few months of the Chapter 7 case you don’t make the regular monthly payments on time, the lender will often ask the bankruptcy court for permission to repossess your vehicle even before the case is completed.
Even if you succeed in the above, some of these lenders are quicker to repossess if you are late with payments any time during the life of the contract, and then sue you to collect whatever is still left owing after selling your vehicle and applying the sales proceeds to your balance.
The Advantages of Chapter 13
So, if you can’t meet these requirements, but you believe you have to keep your vehicle for commuting and/or to fulfill other responsibilities, Chapter 13 “adjustment of debts” is worth seriously considering.
It can help in two huge ways:
it can almost always give you more time to catch up if you’d fallen behind on payments; and
Chapter 13 case can also, under certain conditions, reduce your monthly vehicle loan payments, likely lower your interest rate, and reduce the total amount to be paid on the loan.
Lots More Time to Cure Any Back Payments
Instead of being required to pay in full any missed payments in a matter of weeks under Chapter 7, Chapter 13 usually gives you several years to do so. In situation where you do not qualify for “cramdown” (see immediately below), your Chapter 13 plan designates a certain amount of your monthly payment to go towards your arrearage. As long as you consistently make your monthly plan payments and your regular monthly vehicle payments (usually also included within the plan payment) on time, and keep up on your insurance, your lender usually has to allow you to do this.
Under certain circumstances, you can keep your vehicle without needing to make up any missed payments, and get some other huge benefits.
If you entered into your vehicle loan more than 910 days (about two and a half years) before filing your Chapter 13 case, and your vehicle is worth less than what you owe on it, you can go through a process informally called “cramdown.” The debt you owe on your vehicle is divided into the secured portion—the value of the vehicle—and the unsecured portion—the rest of the debt. Your monthly payment is recalculated based on paying only the secured portion, often with a lower interest rate, often extending the length of payments, usually resulting in a lower monthly payment, often hundreds of dollars less. The remaining unsecured portion is paid along with the rest of your other unsecured debts usually only to the extent you have available money in your budget to do so. “Cramdown” can often enable you to keep your vehicle for much less per months and thousands of dollars less overall.
Chapter 13 gives you some very valuable tools for keeping your vehicle. You may have other reasons for considering Chapter 13, because it handles various other kinds of debts more favorably than Chapter 7. It’s definitely an option worth exploring with your attorney.