Vehicle Debts Under Chapter 7 and Chapter 13

Law Office of Robert L. Firth Feb. 8, 2016

Bankruptcy helps pay for your car or truck. Chapter 7 and 13 each can help you in their own way.

Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.

1. Is your car or truck completely protected by the vehicle “exemption”?

Start by learning whether there is any risk that a bankruptcy trustee would have the right to take your car or truck from you if you filed a Chapter 7 “straight bankruptcy” case. In most situations a person’s vehicle is “exempt,” protected from that happening. Most of the time your vehicle’s value or the amount of equity you have in it is not more than the amount you can “exempt.”

But the “exempt” dollar amount that would apply in your case is different depending on the state in which you live. That “exemption” amount sometimes even depends on how long you’ve lived in that state, and even on how long you’ve live in a prior state. So in this and other respects determining whether your vehicle is “exempt” is trickier than you might think.

In any event, if your vehicle IS “exempt,” you can file a Chapter 7 case and not worry about the trustee’s laying claim to your vehicle.

However, IF your vehicle is worth too much, or you have too much equity in it (its value minus your debt on it) so that its value or equity is not covered by the applicable “exemption,” you have two options:

  1. File a Chapter 7 case and pay the bankruptcy trustee for the right to keep the vehicle—the amount by which its value or its equity is greater than your permitted exemption. This amount can usually be paid through a series of monthly payments.

  2. File a Chapter 13 “adjustment of debts” instead to protect the vehicle. This gives you a safe way to pay the “non-exempt” amount to your trustee (and thus to your creditors) through a court-approved plan. As a result you keep your vehicle by your creditors receiving over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.

2. Are you current or almost current on your vehicle payments but having trouble keeping current?

Either Chapter 7 or 13 can help you afford your vehicle payments by reducing or eliminating your other debts. Bankruptcy allows you to reprioritize your financial life. It empowers you to focus on what’s more important to you. That’s often includes your vehicle, which likely gets you to work and gives you the means to take care of your other personal and family responsibilities. Bankruptcy allows you to be sensibly proactive. You enable yourself to make your car payments, and be able to afford its necessary maintenance and repairs—before it’s too late.

3. Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?

If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7 or Chapter 13.

And if you are not current but can catch up within a month or two after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle.

However, if you couldn’t catch up that quickly, you will likely need the additional benefits of Chapter 13 to buy more time with your creditor.

4. Did you buy your vehicle at least two and a half years ago, and is your vehicle worth less than what you owe on it?

If so, you would likely be able to do a “cramdown” on your vehicle loan in a Chapter 13 case. Through your court-approved plan you would be able to, in most cases, both reduce your monthly payment and the total you’d pay on your vehicle loan.

“Cramdown” in effect enables you to rewrite your loan under better—often much better—terms. The new lower monthly payment is based on the value of your vehicle, often also with a lower interest rate and payments extended over a longer period.. Besides a lower monthly payment, a “cramdown” could save you many thousands of dollars over the life of the loan. And it would leave you with a free and clear vehicle at the end of your Chapter 13 case.

So if you qualify for a vehicle loan “cramdown” that is often a good reason to file under Chapter 13, because it is not available under Chapter 7.

5. Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?

Bankruptcy can help you keep your vehicle in various ways. But it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances.

Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction, AFTER adding its additional costs of going through the repossession/sale process. This deficiency balance is often much higher than you expect. Bankruptcy gives you the opportunity to get rid of that debt.

Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances point you towards filing under Chapter 13.