Chapter 13 Enables You to Keep Your Vehicle, and Often for Less Money
June 15, 2015
Keep your vehicle whether you are current on it or not, and maybe reduce its monthly payments and the loan balance.
If Your Vehicle Loan Is Less than Two and A Half Years Old
With newer loans you generally cannot change the monthly payment or the total amount to be paid on the vehicle by filing a Chapter 13 “adjustment of debts” case. But here’s what you CAN do:
If you are behind on the vehicle loan payments, Chapter 13 gives you lots of time to catch up. If you are behind and don’t file a bankruptcy case your vehicle could be repossessed at any time. If you file a Chapter 7 “straight bankruptcy” case you’re temporarily protected from repossession but would almost always have to catch up on the missed payments within a month or two—in addition to keeping up on the regular monthly payments—if you want to keep the vehicle. But in a Chapter 13 case you will have years—up to 5 years, if necessary—to catch up.
You can pay less to your other creditors under Chapter 13 so that you can afford to pay your vehicle payment (whether you are currently behind or not). You might even be able to pay little or nothing to all or most of your other creditors. Chapter 13 allows—indeed requires—you to prioritize your debts in the way the law prescribes, with some creditors getting paid in full, sometimes others paid less but almost in full, and then the rest paid less.
If your vehicle was bought for business purposes and is worth less than what you owe on it, you would likely be able to reduce the monthly loan payments and the total that you would pay on the loan. This is informally called a “cramdown.” Usually you can’t do a “cramdown” on a vehicle loan that is less than two and a half years old, but you can if the vehicle was not “acquired for [your] personal use.”
You can also do a “cramdown” if the vehicle securing the loan was not purchased with the money owed. So if you owned a vehicle free and clear and then provided it as collateral on a bank loan, and if now the vehicle’s value is less than the amount of the debt, you would likely be able to reduce both the monthly payments and the total amount paid on the loan.
If Your Vehicle Loan Is More than Two and A Half Years Old
With somewhat older loans (specifically, older than 910 days from the date of the loan to the date of the Chapter 13 filing), you CAN do a “cramdown” if the vehicle is worth less than the amount of the debt, even if the vehicle was purchased for “personal use.”
With “cramdown” the amount you owe is “crammed down” to the value of the vehicle, which is often thousands of dollars less than you would otherwise owe. As a result almost always you pay a lower monthly payment, and often at a lower interest rate. Usually this means that you pay a lot less overall for the vehicle before owning it free and clear. And if you are behind on the payments at the time your case is filed you don’t need to catch up on the missed payments at all.
The way this works is that within your Chapter 13 payment plan put together by your attorney your vehicle loan balance is divided into two parts: the secured and unsecured amounts. The secured amount is based on the value of the vehicle. The unsecured amount is the rest of the loan balance beyond the vehicle value.
The loan is essentially re-written for the secured amount, often at a lower interest rate, and also often spread out over a longer term. As a result the monthly payment is usually reduced, sometimes very significantly reduced. Then you pay the remaining unsecured amount to whatever extent all of your regular unsecured creditors are being paid, which can in some circumstances can be very little, or even nothing.
For example, if you owe $15,000 on a vehicle worth $10,000, with monthly payments of $350, the secured part of that loan is $10,000, and the unsecured part is the amount left over, $5,000. Through “cramdown” the loan is essentially re-written for $10,000, with the payments spread out over as long as 5 years, about $175 per month. Then the remaining unsecured $5,000 is added to the rest of your other unsecured creditors. If as usual you are paying just a portion of your unsecured debt in your Chapter 13 plan (based on what you can afford to pay), then adding the unsecured part of the vehicle loan to your other unsecured debts merely reduces how much your other creditors receive.