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Your Vehicle Loan Options in a Chapter 13 “Adjustment of Debts” Case

Chapter 13 helps much more than a Chapter 7 case IF you’re behind on payments or sometimes if you owe more than your vehicle is worth.

 

Chapter 7 Reminder:

Let’s start by summarizing your options for your vehicle loan under Chapter 7 as laid out in my last blog:

1. Retain the vehicle: Just maintain the regular payments if you’re current. Or if you are behind, pay all new monthly payments right when they are due, AND catch up on ALL back payments so that you are current on the account within a month or two of filing the bankruptcy case. Either way, you will very likely be required to sign a “reaffirmation agreement” requiring you to still pay the vehicle loan under its original terms, including eventually paying the entire balance. You get to keep the vehicle but with all of its debt.

2. Surrender the vehicle: You get the benefit of discharging (forever writing off) any “deficiency balance”–the often large amount that you would normally still owe after the creditor sells off your vehicle for less than the loan balance. The vehicle’s gone but so is all your debt. You let go of the vehicle but lose its debt.

Limitations of Chapter 7

But what if you need and want to keep your vehicle, but are behind and just have no way of pulling together the money to bring the account current within a month or two after filing the Chapter 7 case?  Or what if you really can’t afford the monthly payments but, again, need the vehicle? Or if you owe on it a lot more than it is worth, and so you are reluctant to “reaffirm” and be stuck with paying off that balance?

Some vehicle creditors may be somewhat more flexible—though rarely—by giving you more time to catch up on late payments, or by wrapping those payments into the loan balance. Even more rarely, a vehicle creditor may reduce the balance somewhat to avoid you surrendering the vehicle so that the creditor would get even less.

But these situations are indeed quite rare, and may not even help you enough. Chapter 13, however, can give you much stronger medicine.

“Cram Down” is a Huge Advantage If You Qualify

Chapter 13 gives you the ability, essentially, to unilaterally rewrite your vehicle loan, often with much, much better payment terms. The process has the informal name, “cram down,” because the secured balance of the loan is “crammed down” to the market value of the vehicle.

To qualify to do a “cram down” in a Chapter 13 case you must have started the vehicle loan more than 910 days (about two and a half years) before filing your case. Sounds arbitrary, but if your loan is at least that old (and, as usual, you owe more than the vehicle is worth), then you can do a “cram down”; if the loan is newer than that, you can’t.

Under “cram down” the secured balance on the loan—the amount you have to pay for sure—is reduced to the vehicle’s fair market value. Sometimes the interest rate can also be reduced, and often the loan’s length can be extended. The combined effect of these changes is usually to reduce the monthly payment amount, often greatly. On top of all this, you don’t have to pay any back payments because they are wrapped into the rewritten loan.  

The part of the loan balance beyond the vehicle’s fair market value—the unsecured portion—is paid the same percentage as the rest of your “general unsecured” debts (credit cards, medical bills, etc.). If you are like most people, adding that unsecured portion of the loan to their pool of “general unsecured” debts does not add anything to what they have to pay during your Chapter 13 case. That’s because those creditors usually just get paid as a pool whatever your budget says you can afford to pay during the term of your court-approved payment plan. So adding the unsecured portion of your vehicle loan to that pool of debts tends simply to reduce what each creditor gets out of the same set amount of money you pay to that pool of debts.

With “cram down” usually you pay significantly less than you would have otherwise, and then receive your vehicle free and clear at the end of the Chapter 13 case.

Chapter 13 Advantage Even without Qualifying for “Cram Down”

If your vehicle loan is not yet 910 days old so that you don’t qualify for “cram down,” or if your vehicle is worth more than the loan balance so that “cram down” would just not do you any good, Chapter 13 can still be helpful if you were behind on your loan payments. Why? Because instead of having to bring the account current in a month or two as you would under Chapter 7, you would have many months to do so.

Surrender the Vehicle

Although Chapter 13 often solves many of the problems that Chapter 7 would leave you with for keeping your vehicle, if you just don’t need it, or still can’t afford even the reduced payments, you can surrender it.

The difference from Chapter 7 is as follows. Remember from the beginning of this blog post that when you surrender a vehicle under Chapter 7 the “deficiency balance” is legally written off, without the creditor almost always receiving nothing. Under Chapter 13, in contrast, that “deficiency balance” is added to the rest of the pool of your “general unsecured” debts. But also remember from the discussion above (about the unsecured portion of a vehicle loan in a “cram down”), that in most cases that would not cost you anything more than if you didn’t surrender your vehicle. That’s for the same reason discussed above: because you usually pay the pool of your “general unsecured” debts the same total amount no matter how much debt is in that pool. The other creditors would just get less to make up for whatever money the vehicle loan creditor would get.

 

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Your Vehicle Loan Options in a Chapter 7 “Straight Bankruptcy” Case

For many people, no debt has more practical importance than their car or truck loan.

 

Whether you want to keep your vehicle or get rid of it, and whether you are current or behind on your payments, Chapter 7 bankruptcy strengthens your hand in every way.

The “Automatic Stay” Gives You the Chance to Decide to Keep or Surrender

As long as you file your Chapter 7 case before your vehicle gets repossessed, your lender can’t repossess it once you do file. The same “automatic stay” law that stops all your creditors from calling you, suing you, and garnishing your wages also stop your vehicle lender from repossessing your vehicle—at least for a month or so while you decide whether to keep your car or not, if you haven’t already decided one way or the other.

Surrendering Your Vehicle

If you decide to surrender your vehicle, Chapter 7 bankruptcy is often the best way to do so. The reason is because with most vehicle loans even after surrendering the vehicle you would still owe money to your lender after the surrender, often a much larger amount than you would think. This “deficiency balance” is the amount you owe after the lender repossesses the vehicle, sells it—usually at an auto auction, pays itself its costs of repossession and sale out of the proceeds of sale, and then pays the rest of the proceeds towards your loan’s interest, late fees, and principal balance.

Because of the relatively low sale price of your vehicle at an auto auction, and the relatively high repossession and sale costs, in the end you often have a very hefty debt, and no vehicle. Because at that point you’re understandably not all that motivated (or able) to pay this remaining debt, the lender would then usually sue you to make you pay it.  

 

Surrendering your vehicle during your Chapter 7 case allows you to legally and permanently write off (“discharge”) that entire remaining debt, instead of having it hang over you.

Keep Your Vehicle

If you want to keep your car or truck, whether you are current on your loan, and if not how quickly you can catch up, are crucial.

If You Are Current

If you want to keep your vehicle and are current at the time your Chapter 7 case is filed, and can keep making the payments on time (especially after discharging your other debts), it’s simple: you can essentially keep your vehicle loan out of your bankruptcy case. You’d usually sign a “reaffirmation agreement” stating that you intend to hang onto your vehicle and giving your consent to not discharging the vehicle loan in your Chapter 7 case.

If you owe more on the loan than your vehicle is worth, you should think twice about signing a “reaffirmation agreement.” That’s because doing so makes you continue to be liable on a debt you could be discharging in bankruptcy. Instead carefully consider whether you should surrender it and dump the debt. It’s your one chance to do so. Otherwise you would risk being unable to make your payments later, losing the vehicle to repossession, and owing a large deficiency balance because you had “reaffirmed” the debt in your bankruptcy case.

Unfortunately you can’t “have your cake and eat it too”: you usually can’t keep a vehicle that you owe on without reaffirming the debt. Most conventional vehicle loan creditors insist that you sign a “reaffirmation agreement” for the full balance of the loan, even if your vehicle is worth less than that.

But sometimes, especially with smaller lenders, you may be able to avoid “reaffirming” the vehicle debt, or can “reaffirm” at a lower balance. Talk with your attorney about what’s possible with your own lender.

If You Are Not Current

If you want to keep your vehicle and aren’t current on the vehicle loan at the time your Chapter 7 case is filed, your options are limited. You would usually need to get current very quickly to be able to keep the vehicle—usually within a month or two. Most vehicle lenders will not allow you to skip the missed payments or even to catch up on those payments over time—although a minority of them will allow some flexibility.

But for the majority of lenders who insist on a full “reaffirmation” of the vehicle loan balance, they’ll demand that you get current within weeks after you file your case. One reason is because for a “reaffirmation agreement” to be legally valid, it has to be filed with the bankruptcy court before the debt is discharged, which happens in most cases about three months after it’s filed. So the lender insists that you get current well before that so that the “reaffirmation agreement” can be prepared, signed, and filed at court in time.   

Again, talk with your attorney to find out if your lender is one of the uncommon more flexible ones.

Much greater Flexibility through Chapter 13

If you need or want to keep your car or truck but are behind on payments and can’t catch up within a month or two after filing, consider the Chapter 13 “adjustment of debts” option instead of Chapter 7. Chapter 13 may not only give you more time to catch up on those back payments, but may even substantially reduce your monthly payments, the interest rate, and the total amount to be paid on the loan. I’ll discuss these Chapter 13 tools in my next blog post.

 

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