Use Chapter 13 if You’re Behind on Your Vehicle Loan

Law Office of Robert L. Firth June 20, 2016

Chapter 13 gives you lots of time to catch up on your vehicle loan. Or you might not even need to catch up on it at all.

Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. However, Chapter 13 gives you many months, maybe even several years, to catch up.

Also, if you owe more on the loan than the vehicle is worth, and you got it more than two years and a half years ago, you probably won’t even need to catch up on missed payments. On top of that, you will likely be allowed to lower you monthly payments, and pay less on the loan overall until you own your vehicle free and clear.

Let’s show you how this works.

The Law About Falling Behind on Your Vehicle Loan

A vehicle loan really consists of two commitments made to your lender:

  • a promise to pay a certain amount each month, plus interest, until the debt is paid off

  • a lien on the vehicle that you’ve granted to the lender, giving it a right to repossess your vehicle if you don’t keep your promise to pay

So when you fall behind on your vehicle payments, your lender has the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay”—your protection against most collection actions against you or your property—stops the vehicle repossession. This protection lasts as long as the bankruptcy case is open and active.

The exception is if your lender files a motion to ask the bankruptcy court for “relief from the automatic stay.” If it succeeds in that motion, the lender gets the “automatic stay” lifted as to the vehicle and would again be able to repossess your vehicle.

If You’re Behind on Your Vehicle Loan Under Chapter 7

A Chapter 7 case is open usually for three, four months. So that is how long you have protection from repossession if you are not current on your payments. (Again, that time period of protection could be shorter if the lender files and prevails on a motion asking that the “automatic stay” protection be lifted.)

Chapter 7 could be a good option for your vehicle loan if you can get current on that loan before the automatic stay expires. Practically speaking, that usually gives you about two months or so after the bankruptcy filing to get current.

You don’t usually get the full three, four months that the case is open. That’s because the lender prepares a document called a reaffirmation agreement, which you must sign and is then filed at the bankruptcy court, all before the case closes. Lenders generally want you to be current when the reaffirmation agreement is filed at court. Plus preparing that paperwork and getting it signed and filed takes a certain amount of time.

So essentially, if you want to keep a vehicle that you’re behind on its payments, filing a Chapter 7 case would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the practices of your lender when you discuss your vehicle loan options.

If You’re Behind on Your Vehicle Loan Under Chapter 13

If you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you. That’s because in most situations you would be allowed to catch up over a period of many months, potentially even of a few years.

In some situations you may not even need to catch up at all. This happens if, and only if:

  1. you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and

  2. your vehicle is worth less than your debt against it.

If so, you are eligible for what is informally called a “cramdown” of the vehicle loan. You will NOT need to catch up on the loan at all as to any payments not paid before your Chapter 13 case was filed.

You would just need to make payments starting after your case was filed, But through “cramdown” most of the time that payment would be less than the contractual amount. Depending on all the circumstances, the payment may be much less. The interest rate can often be reduced as well.

When you combine not needing to pay the missed payments, the lower monthly payments, and the lower interest rate, the end result is that you end up paying less on the loan overall. It’s not unusual that you pay thousands of dollars less. At the end of your successful Chapter 13 case whatever you haven’t paid on the vehicle loan’s contractual balance is “discharged”—permanently written off. Then the lender releases its lien, and the vehicle is all yours.