Why? Because you may be able to keep a vehicle you thought you couldn’t afford to pay for. Chapter 13 allows you to pay smaller monthly vehicle loan payments, under certain conditions. You may be able to pay off the debt and own the vehicle free and clear for a lot less than the loan balance.
This blog is one of a series on the mistakes people make before seeing an attorney about filing bankruptcy. These decisions often seem sensible from a certain angle. But almost always they are made without knowing all the options.
If you need a vehicle but just can’t afford the monthly payments, you probably figure that you are going to lose the vehicle and don’t have any choice about it. You know the contract requires you to make the payments or you lose the vehicle. You may have been trying hard for months to keep or get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the vehicle go except you’ve got to have a vehicle for work and/or other family obligations, and have no way to replace it. You feel stuck, with no good options.
On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the vehicle—that you still have to either make the payments, and catch up if you’re behind, or else lose the vehicle.
That’s true, in a “straight bankruptcy,” a Chapter 7.
But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you can likely do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall for the vehicle. You may well also be able to lower your interest rate.
The two conditions to be able to do a “cramdown”:
1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and
2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.
If your vehicle loan meets these two conditions, we can essentially re-write your loan. We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting often in a radically reduced monthly payment.
What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.
And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.
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 while immediately having it cost you much less to do so. 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 me to find out your options.