You can keep your car in Chapter 13 bankruptcy, even after falling behind on payments, if you have enough income to pay the monthly vehicle payment, the required repayment plan payment, and your monthly expenses.
You'll keep all of your property in Chapter 13, including cars, because the Chapter 13 repayment plan affords benefits that aren't available in Chapter 7. For instance, in Chapter 13, you can protect at least some car equity using bankruptcy exemptions, catch up on late payments if you've fallen behind, reduce a vehicle loan's interest rate, and possibly reduce the principal balance owed through a cramdown. You can also handle car leases in Chapter 13 bankruptcy.
Exemptions Help You Keep Your Car in Chapter 13
Each state has "exemption" laws that explain the specific property you can keep in bankruptcy. If an exemption fully covers an item, you'll keep the asset without doing more. But that's not always the case. Sometimes an exemption partially covers your property's equity. Or you might own something an exemption doesn't protect. In either case, your creditors would be entitled to the value of any "nonexempt" equity. (11 U.S.C. § 522.)
In Chapter 13,the Chapter 13 trustee doesn't sell property the way a Chapter 7 trustee would. Instead, you pay your creditors to keep nonexempt property by paying the value of the nonexempt property in your Chapter 13 repayment plan.
Exempt Cars in Chapters 7 and 13
For instance, suppose your state lets you exempt $10,000 of car equity. If your car's equity is worth $10,000 or less, the Chapter 7 trustee wouldn't sell it, and you'd keep the car. In Chapter 13, you wouldn't need to pay a higher monthly repayment plan payment to keep your vehicle.
Nonexempt Cars in Chapters 7 and 13
Suppose you own a Tesla outright worth $40,000, but your state's motor vehicle exemption limits you to $10,000 of equity. The Chapter 7 trustee would sell the car, give you the $10,000 exemption amount, and distribute the rest to creditors after deducting sales costs and the trustee's fee. Assuming expenses of 20%, creditors would receive $24,000.
In Chapter 13, the trustee wouldn't sell your Tesla, but you wouldn't be off the hook financially. You'd pay your creditors $24,000—the amount they would have received in Chapter 7—through your Chapter 13 payment plan. Keeping your car would cost you $400 per month for five years.
But these calculations address equity only. Keep reading if you have a car payment.
Paying Your Car Payment in Chapter 13 Bankruptcy
If you're making vehicle payments but no longer want the car—for instance, it's too costly or needs repairs—you can give it back to the lender in Chapter 13. It won't cost more than you'd otherwise have to pay to return the car and wipe out the debt.
However, keeping a car with an outstanding loan requires continued monthly car payments. Otherwise, the lender can take or "repossess" the vehicle using the lien rights you agreed to when buying it on credit. The lien lets the lender take back the car if you don't pay as agreed—even if you file for bankruptcy.
Who Will Pay My Car Payment in Chapter 13?
Many courts let you pay your car payment directly to the lender, or "outside the plan." It's cheaper than paying your car payment through your repayment plan because you avoid paying the trustee's fee, which can be up to 10%.
However, people behind on a car payment when filing for Chapter 13 often must pay the monthly amount and arrearages in the plan (more below). Ultimately, your court rules will determine what you'll do.
Catching up on Late Car Payments in Chapter 13 Bankruptcy
Chapter 7 doesn't offer a repayment plan, so filers can't catch up on a car payment if they're behind when they file. As a result, Chapter 7 filers with late car payments lose their vehicles because Chapter 7 doesn't protect cars in these instances.
By contrast, you can catch up on an overdue car payment in Chapter 13. You'll propose a plan that pays car arrearages over the three- or five-year plan length. You might opt for a five-year plan even if you qualify for three if it helps keep your monthly plan payment affordable. And, as with all car loans, you can reduce the interest rate and pay less—your bankruptcy lawyer will know the current amount.
How to Cram Down a Car Loan in Chapter 13 Bankruptcy
If you satisfy certain conditions, you can reduce or "cram down" the principal balance of your car loan to the car's fair market value. After you pay the lender an amount equal to your car's value and complete your plan, the court wipes out ("discharges") the remaining loan balance.
To qualify for a cramdown, your car loan must be a purchase-money loan—meaning the lender financed the vehicle—for a car bought for your personal use, and you must have taken out that loan more than 910 days (roughly two and a half years) before you filed for Chapter 13 bankruptcy. If you bought the car within 910 days of filing, you can't cram down the loan, and you'll need to pay the full contract balance to keep the vehicle. (11 U.S.C. § 1325(a).)
Example. Justin owes $10,000 on a car worth $7,000 that he bought three years before filing. Because Justin's loan is more than 910 days old, he qualifies for a cramdown and will pay the lender $7,000 through his Chapter 13 plan. He will own the vehicle free and clear after bankruptcy.
Can I Pay My Car Off While in Chapter 13 Bankruptcy?
Yes, many people pay off car loans in Chapter 13 and emerge from bankruptcy owning their vehicle free and clear. The reason is relatively simple. You must pay your monthly car payment in Chapter 13, and most Chapter 13 repayment plans last five years. So, as long as you have less than five years remaining on your vehicle loan when you file, you'll pay off the loan in your plan.
What Happens to a Car Lease in Chapter 13 Bankruptcy?
What happens to your car lease in Chapter 13 bankruptcy depends on whether you are behind on your payments and what the bankruptcy trustee decides to do with the lease – the trustee can assume or reject the car lease. If the trustee does not want to "assume" the lease, you can choose to continue with the lease or give up the car. But before making any decisions, you should decide whether keeping the vehicle is affordable.
The Automatic Stay and Car Leases in Chapter 13
When you file for bankruptcy, the automatic stay stops all collection actions, including efforts by a car lessor to repossess a leased car. However, suppose you are behind on your car lease payments when you file for Chapter 13 bankruptcy. In that case, your car lessor will likely ask the court to lift (end) the automatic stay. (11 U.S.C. § 362.)
It does this by filing a motion for relief from the automatic stay. A successful lessor can pursue state law remedies to collect on the debt you owe, including repossession of your car.
The Bankruptcy Trustee's Decision to Assume or Reject the Car Lease
The trustee may assume or reject a car lease in the bankruptcy. If the trustee assumes the lease, the lease continues to be enforceable as written. The trustee will only assume the lease if it would monetarily benefit the bankruptcy estate. (11 U.S.C. § 365.)
For example, suppose the trustee is able to lease the vehicle to someone else for more money than the lease payment, and the estate gains income. In that case, the trustee may decide to assume the lease. If there is no benefit to the estate, then the trustee will reject the lease, basically stating that the lease is not an asset of the estate.
If the trustee does not assume it before the plan is confirmed, the lease is deemed rejected as of the conclusion of the confirmation hearing. At that point, the automatic stay ends.
The Debtor's Decision to Continue the Lease or Surrender the Car
If the bankruptcy trustee rejects the lease, you can "assume" or continue with the lease or end the lease and surrender the car. Even though the bankruptcy trustee must reject the lease before you can assume the lease or surrender the car, you must generally indicate your preference in your bankruptcy papers. You do this on Schedule G: Executory Contracts and Unexpired Leases.
Surrendering the Car
Many courts require that if you want to surrender the car, you must do so no later than the plan confirmation date. If you decide to surrender your vehicle and the period for the trustee to assume it has not yet passed, you should contact the trustee to request that the trustee go ahead and assume or reject the lease so that you may proceed.
Once you surrender the vehicle, either voluntarily or involuntarily after the stay is lifted, the creditor will sell it and then apply the proceeds, minus administrative fees, to the balance owed. If the sale proceeds do not pay off the loan's balance, the remaining amount owed is an unsecured debt. Within certain time limits, the creditor can file an unsecured non-priority proof of claim for the balance owed. (11 U.S.C. § 502.)
Assuming the Car Lease
If you assume the car lease, the lease continues in full force and effect, and there is no debt discharge. If you are considering assuming the lease, you should review the written lease carefully to make sure you can still afford the terms. Many car leases contain undesirable clauses such as mileage limitations, odd term lengths, or residual or other fees that may no longer be in your best interest.
Some bankruptcy districts require you to pay through the Chapter 13 plan, and others require that you pay the lender directly. If you assume the lease, you must make your payments on time and keep your car insurance current during your Chapter 13 case.
After you complete your Chapter 13 bankruptcy plan, the lease continues in full force and effect as it did during the bankruptcy. If you cannot repay the lease and the vehicle is repossessed, you will be liable for any remaining debt.
Navigating Your Bankruptcy Case
Your car is one of your most valuable possessions. It's a good idea to speak with a lawyer to ensure you can keep everything you own before filing. Here are the articles that might interest you next.
