Keep Your Vehicle with More Time to Catch Up and a Lower Monthly Payment
What can you do if you MUST keep your car or truck, but can’t afford the monthly payments?
Or if you fell behind and just can’t catch up?
Chapter 7
A regular bankruptcy”—Chapter 7—won’t usually help in these situations.
It would only help if writing off your other debts results in you able to do ALL of the following:
1) catch up on any missed payments within a month or two of filing the bankruptcy,
2) start making the regular monthly payment on time by the next due date, AND
3) consistently pay on time all the rest of the monthly payments on the contract.
Most vehicle loan lenders—especially the major national ones—are just not flexible about any of this. If you do not have the means to catch up on any missed payments fast enough, you will generally not be allowed to keep the vehicle. If during the Chapter 7 case itself you don’t make the regular monthly payments on time, the lender may well ask the bankruptcy court for permission to repossess your vehicle even before the case is completed. And even if you get past all that, some of these lenders are quicker to repossess if you are late with payments any time down the line.
As far as lowering the payments or changing any of the other terms of the contract, very few vehicle lenders will even consider doing that.
Chapter 13
So, if you can’t meet these payment hurdles, but you have no choice but to hang on to your vehicle to commute to your job or to meet other family responsibilities, the other kind of consumer bankruptcy, Chapter 13, is worth seriously considering.
It can help two ways:
1) almost always it can give you more time to catch up if you’re behind; and
2) under certain conditions a Chapter 13 case can also—through a “cram down”—reduce your monthly vehicle payments, likely lower your interest rate, and shrink the total amount you need to pay on the loan.
Lots More Time to “Cure the Arrearage”
Instead of being stuck with catching up on any missed payments in a matter of weeks (as under Chapter 7), Chapter 13 often gives you many months or even a few years to bring your account current. A portion of your plan payments would go towards your arrearage. Generally, as long as you consistently make your plan payments and your regular monthly vehicle payments (usually also included in the plan payment) on time, and keep up on your insurance, your lender has to allow you to do this.
“Cram Down”
Under some conditions, you will be able to keep your vehicle without needing to make up any missed payments. Through a “cram down,” the amount you must pay for your vehicle is reduced to the value of the vehicle. The interest rate is often reduced, the length of the loan is often extended, all of which usually result in a reduced monthly payment, often significantly so.
“Cram down” only makes sense when—as is very often but not always the case—your vehicle is worth less than what you owe on it.
Bankruptcy law only allows a “cram down” if you got your vehicle loan at least two and a half years before filing your Chapter 13 case—910 days, to be precise.
Conclusion
Chapter 13 provides some extremely valuable tools enabling you to keep your vehicle. This may or may not justify filing under Chapter 13 instead of Chapter 7, but it sure means that it’s an option worth exploring with your attorney.