In our last blog we talked about keeping your vehicle in a Chapter 7 case through the protection of the vehicle exemption. But we didn’t talk there about what to do if you have problems making the vehicle loan payments. So what if you really need to hang on to your car or truck, but cannot afford those monthly payments?
Chapter 7—the “straight bankruptcy–won’t help you there. Almost always it’s “take it or leave it” with your vehicle loan in a Chapter 7 case: either keep the vehicle and live with the payment terms of your loan, or surrender the vehicle and write off the debt.
That’s especially tough if you’ve fallen a payment or two behind, and file your bankruptcy a step ahead of the repo man: if you file under Chapter 7 usually you have to come up with the money fast to catch up on the payments.
BUT, if you meet two conditions, you may have to option of keeping your car or truck, lowering your payments, AND reducing how much you end up paying to keep the vehicle. PLUS, if you’re behind on payments when your bankruptcy is filed, you won’t have to make up the missed payments.
The two conditions:
1. You got your vehicle loan at least two and a half years ago.
2. You owe more on the vehicle than it’s worth.
If so, through a Chapter 13 cram-down, you can re-write the terms of your vehicle loan, reducing the balance to the fair market value of the vehicle, sometimes stretching out the term of the loan, sometimes reducing the interest rate, and often lowering the monthly payment by a lot.
Let’s say you are four years into a 6-year loan, with the balance at $11,000 but the vehicle worth only $7,000. The monthly payments are $498, with 24 months to go. With a cram-down, the balance would essentially now be $7,000, and the term stretched to the 36 months of the Chapter 13 case. So now the monthly payment would be reduced to about $220. That is less than half of what the monthly payment had been, saving you $278 per month. Plus in most cases this reduces the total amount to pay off the debt so you have the vehicle free and clear.
The new much lower cram-down payment, along with usually a radical reduction in what you have to pay monthly to the rest of your creditors in a Chapter 13 case, can make it much easier to keep your vehicle.