In Chapter 13 bankruptcy, you get to keep your car and pay off your car loan through a repayment plan. Further, you may even be able to reduce the principal balance and interest rate on your car loan. Read on to learn more about what happens to your car in Chapter 13 bankruptcy.
(For more articles on cars, car loans, and car leases in Chapter 13, including repossession issues, see Your Car in Chapter 13 Bankruptcy.)
Can You Keep Your Car If You File for Chapter 13?
In Chapter 13 bankruptcy, you are allowed to keep all of your property including your nonexempt assets. The Chapter 13 trustee does not sell your property to pay your creditors. In return, you pay back a certain amount of your debts through a repayment plan. This means you can keep your car. However, if your car has nonexempt equity, you must pay your unsecured creditors an amount equal to the nonexempt portion through your plan. (To learn more about how Chapter 13 works and what you must pay through your plan, see Chapter 13 Bankruptcy.)
How Do You Pay Your Car Loan in Chapter 13?
When you file for Chapter 13 bankruptcy, you propose a plan to pay back some or all of your debts over a three to five year period. A bankruptcy normally discharges your personal liability on a car loan but does not wipe out the lender’s lien on the vehicle. So if you want to keep the car, you must continue making payments to your lender. Otherwise, the lender has the right to repossess the car.
In most cases, you pay off your car loan through your repayment plan. You make a monthly plan payment to the bankruptcy trustee and he or she sends a portion of that payment to your car lender. Depending on where you live, certain courts also allow debtors to exclude their cars from the plan and make regular payments outside of bankruptcy. However, if you don’t include your car loan in your plan, you may not be able to take advantage of certain benefits like a Chapter 13 cramdown (discussed below).
What If You Were Behind on Car Loan Payments Prior to Bankruptcy?
If you are in Chapter 13 bankruptcy, your lender cannot repossess your car because of the automatic stay. In order to get paid, the lender must file a “proof of claim” with the court showing how much you owe including all arrears (amounts you are behind on). Unless you object to the lender’s claim or cram down the loan, the entire principal balance including your arrears will be paid off through your plan. If you wish to exclude the car loan from your plan, you must catch up on the arrears outside of bankruptcy or the lender will likely seek court permission to repossess your car.
You May Be Able to Cram Down Your Car Loan in Chapter 13
If you satisfy certain conditions, you can reduce the principal balance of your car loan to the car’s fair market value in Chapter 13 bankruptcy. This is referred to as a car loan cramdown. A car loan cramdown may also allow you to reduce the interest rate on your loan as well.
When you cram down your car loan, you pay the lender an amount equal to what your car is worth through your plan. The remaining loan balance is treated as unsecured and wiped out when you complete your plan and obtain a discharge.
Example. Jason’s car is worth $7,000 but his loan balance is $10,000. If he qualifies for a cramdown, he may be able to pay the lender $7,000 through his Chapter 13 plan and own the car free and clear after bankruptcy.
To learn more, see Can You Reduce Your Car Loan in Bankruptcy?