Keeping a Vehicle with a Debt under Chapter 7 “Straight Bankruptcy”

If you owe a debt on a vehicle, Chapter 7 gives you a narrow choice: keep it and pay on the contract, or surrender it and owe nothing.

 

The Bankruptcy Trustee Only Cares about Equity Beyond Any Exemption

In a Chapter 7 case you have two people besides you who could be interested in your vehicle. The bankruptcy trustee could care about any equity you have in the vehicle (the value over the amount you owe on it), but only if that amount is more than what would be protected under the vehicle exemption. There is seldom too much equity if you owe on a vehicle, but check with your attorney to make sure this is not an issue in your case.

Surrendering a Vehicle to the Lender

You may not want to keep your vehicle because you simply cannot afford to keep making the payments or doing so is just not worthwhile considering your alternatives. Or you may be a couple payments behind, and filed your Chapter 7 case quickly to stop your vehicle from being repossessed, but now realize that hanging on to the vehicle is not feasible for you.

You likely know that if you just surrendered your vehicle without a bankruptcy, you’ll very likely owe and be sued for the “deficiency balance” (the amount you would owe after your vehicle is sold, its sale price is credited to your account, and all the repo and other costs are added). That deficiency balance is often much higher than you expect. The Chapter 7 bankruptcy will almost always write off that deficiency balance. Indeed, that is a common purpose for filing bankruptcy.

Keeping Your Vehicle

 If you want to keep your vehicle, generally you must be either current on your loan or able to get current within about 30 to 60 days after filing the Chapter 7 case. You will almost for sure be required to sign a reaffirmation agreement, which legally excludes the vehicle loan from the discharge (the legal write-off) of the rest of your debts. You have to sign that reaffirmation agreement and have it filed at the bankruptcy court within a short period of time—usually within 60 days after your bankruptcy hearing, meaning you have to be current usually a few weeks before that. Then you have to stay current if you want to keep the car, just as if you had not filed a bankruptcy. And also just as if you had not filed bankruptcy, if that vehicle later gets repossessed or surrendered, there is a good chance that you would owe a deficiency balance. So talk to your attorney and think carefully about the risks before reaffirming your vehicle loan.

The Lack of Other Alternative Usually

Almost always—especially with conventional, national vehicle loan creditors—you are stuck with the terms of your original loan contract if you want to keep your vehicle. You can’t reduce the balance of the loan, the interest rate, or the monthly payment. If you’re behind, almost always you must pay the arrearage and be current within a month or two. There can be exceptions, especially with local finance companies and such who would rather minimize their losses by being flexible. So be sure to ask your attorney whether your vehicle creditor has such as history. And if you do need more flexibility—if you must keep your vehicle, and owe more than it is worth, and you can’t afford the payments—ask about Chapter 13 as a possible better solution.

Conclusion

Usually “straight bankruptcy”—Chapter 7—is the best way to go if your vehicle situation is pretty straightforward: you either want to surrender a vehicle, or else you want to hang onto it and are current or can get current within a month or two of your bankruptcy filing.

 

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Qualify for a Vehicle Loan “Cramdown” by Filing Your Chapter 13 Case at the Right Time

Potentially save thousands of dollars on your vehicle loan by filing bankruptcy when it qualifies for cramdown.


This is the final one of a series of four blog posts on the advantages of filing bankruptcy at the legally opportune time. The last three blogs covered the effect of timing on whether you file a Chapter 7 or Chapter 13 case, on which debts can be discharged, and on what assets you can keep. Today’s applies only to Chapter 13 “adjustment of debts” cases, because vehicle loan cramdowns cannot be done under Chapter 7 “straight bankruptcy.”

Chapter 13 Vehicle Loan Cramdown

What’s a “cramdown”? It’s an informal term—not found in the federal Bankruptcy Code—for a procedure provided under Chapter 13 law for legally rewriting the loan to reduce, usually, both the monthly payment and the total you pay for the vehicle. A cramdown, essentially reduces the amount you must pay to the fair market value of your vehicle, often also reducing the interest rate, and also often stretching out the payments over a longer period. These combine to result often in a significantly reduced monthly payment, and an overall savings of thousands of dollars.

Qualifying for Cramdown

First, this only works if your vehicle is worth less than the balance on the loan.

Second, emphasizing again, it is ONLY available in a Chapter 13 case, not Chapter 7.

And third, your vehicle loan must have been entered into more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed.

Vehicle Cramdown

It’s of course that last condition that creates the timing opportunity. When you first go in to see your attorney, bring your loan vehicle paperwork (or as much information you have) to see if and when you qualify for cramdown, and whether and how much difference it can make for you.

Here’s an example of the dollar difference that a difference in timing can make.

How Good Timing Can Work for You

Let’s say you bought and financed your car 900 days ago—that’s almost two and a half years. The new car cost $21,500. You did not get a very good deal; your previous car had died and cost way too much to repaid, and you had to quickly get another car to commute to work. You put down $500 (from a credit card cash advance), then financed the vehicle for $21,000 at 8% over a term of 5 years, with monthly payments of $425.

Now almost two and a half years later you owe about $11,500. If you wanted to keep the car, and filed either a Chapter 7 or Chapter 13 case before the 910-day mark, you would have to pay the regular monthly payments for the rest of the contract term. With interest, that would cost a total of about $12,650 more.

Consider if instead you waited until just past that 910-day mark and filed a Chapter 13 case then, and could “cram down” the car loan. Assume that your car is now worth $7,500, and again you owe $11,500. The loan is said to be secured to the extent of $7,500. The remaining $4,000 of the loan is not secured by anything. So the $7,500 secured portion would be paid through monthly payments in your Chapter 13 plan. The $4,000 unsecured portion is treated like the rest of your unsecured debts, which are usually paid if and only to the extent that you have extra money available to pay them.

Under cramdown, you pay the $7,500 secured portion at an interest rate which is often lower than your contract rate. Paying a reduced amount—$7,500 instead of $11,500—at a lower interest rate results in a lower monthly payment. That payment is often reduced substantially further by extending the repayment term further out than what the contract had provided, up to a maximum of five years (from the date of filing the Chapter 13 case).

In this example, assuming an interest rate of 5% and a repayment term of five years, the payment on the $7,500 would be less than $142 per month. The total remaining payments on the loan, with interest, would be about $8,492, in contrast to paying $12,650 under the contract. That is a savings of $4,158.

Note that under cramdown, even though the repayment term stretches the payments about two and a half years longer than under the contract, the amount of interest to be paid is often less. That’s both because the interest rate is often lower, and it’s being applied to a lower principal amount (here 5% interest instead of 8%, and $7,500 instead of $11,500).

So, by tactically holding off from filing a Chapter 13 case until after the 910-day period expires, in this example you would reduce the monthly payment from $425 to $141.50, and save more than $4,000 before owning the vehicle free and clear. 

 

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Mistakes to Avoid–Don’t Surrender Your Vehicle or Get it Repossessed

What if you could pay less per month, lower the interest, and pay less until you owned your vehicle free and clear?

 

Bankruptcy as a Game-Changer

Bankruptcy is full of surprises, mostly pleasant ones. The most important reason to see a bankruptcy attorney sooner rather than later is that you will then more likely be able to take advantage of those pleasant surprises.

Vehicle Surrender or Repossession Almost Never Good

Whether or not bankruptcy can save your car or truck, surrendering it without having a well-informed plan about what you are going to do next is almost never a good idea. And putting yourself into a situation in which it gets repossessed can really hurt, both immediately and long-term.

Almost always, if you surrender your vehicle, you will owe money on the debt after your creditor sells the vehicle and credits your account the sale’s proceeds. And you will usually owe much more than you think you will. Sometimes shockingly more.

That’s partly because the vehicle will likely be sold for less than it is worth. The creditor is not trying to be unfair about this, but it’s usually efficient for it to sell repossessed vehicles at an auto auction, where most of the purchasers tend to be used car dealers who can only pay enough for the vehicle to be able to make a profit when they re-sell it. On top of a low selling price, your creditor will tack onto your balance all of its repossession and sale costs, which can really add up. The end result is that you will likely owe a lot of money, and will likely get sued to make you pay it. Once wage and bank account garnishments start, you will probably be forced to consider bankruptcy. As you will see, it’s much better to consider it BEFORE surrendering or losing your vehicle to repossession.

Escaping Your Catch-22

If you need your vehicle, but just can’t afford the monthly payments, you could very sensibly believe you don’t have much choice but to let the vehicle go. You know your contract requires you to make the payments or lose the vehicle. You may have been struggling for months to keep the payments current, putting up with late fees and constant notices or phone calls from the creditor. You might even be thinking about how you can do without this vehicle, especially if you have already fallen behind.

How Chapter 7 Can Help

The main way Chapter 7 “straight bankruptcy” can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payment. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to any approaching repossession. You would then have a month or two, sometimes more, to catch up. Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing Chapter 7 BEFORE losing your vehicle could well be your best move.

How Chapter 13 Can Help

But admittedly that may not be enough help. You may be able to afford the monthly payments if you had no longer had any other debts, but have no way to make up the missed payments that quickly. Or you might have other important debts that you’re behind on, like taxes or child support, and can’t see hanging on to your vehicle in the midst of all these financial pressures. And you might not even be able to quite afford the monthly vehicle payments even with no other debt obligations.

Chapter 13 may be able to cut through ALL of these problems.

First, Chapter 13 can give up to 5 years to catch up on the back payments. Under some circumstances, you might never even need to catch up on them.

Second, Chapter 13 often allows you to pay your vehicle payment first, before other important debts like taxes and support.

And third, if your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s about two and a half years), you can do a “cramdown” on the vehicle loan: lower your monthly payment, and likely pay less overall for the vehicle before owning it free and clear. How much the monthly payment can be reduced depends on a bunch of factors, but especially if your vehicle is worth significantly less than you owe on it, the payment can often be made much lower.

And if you qualify for a “cramdown” and you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t ever have to catch up on those missed payments.  They are just part of the re-written, new “crammed down” obligation.

Take Charge and Choose Your Best Option 

So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed, if instead you could keep that vehicle through either Chapter 7 or 13. That may be especially true if you qualified for a lower monthly payment under the Chapter 13 “cramdown.”

Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, come see us to find out your options. 

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