Keeping Two Cars in Chapter 13 Bankruptcy

Although you can often keep two cars in Chapter 13 bankruptcy, it's impossible to predict whether you'll be able to without significant analysis. Your success will depend primarily on whether you can afford the required monthly Chapter 13 plan payment, which can be pretty hefty when trying to keep a second car. The more equity you have in your vehicle, the higher your payment will likely be.

You'll have another hurdle if you're still paying for the second car. You must continue making the monthly payment and catch up on the loan arrears through the plan. Because the requirement means creditors receive less, they'll likely object.

When faced with that situation, you'd want to show you need the vehicle to work and earn the money to make the plan payment. Learn the basics of keeping cars in bankruptcy.

Who Files for Chapter 13 Bankruptcy

Most people prefer to file for Chapter 7 bankruptcy because it's quick and doesn't require paying into a repayment plan. However, it doesn't work for everyone.

Higher-income earners often don't qualify for Chapter 7. Also, it's more challenging for filers to keep nonessential things like multiple vehicles because the Chapter 7 trustee sells property Chapter 7. Chapter 13 filers keep everything they own.

People who typically file for Chapter 13 bankruptcy have regular incomes and can afford to repay creditors some or all they owe. They usually can pay monthly living expenses and some creditors, but not everything they owe monthly.

Chapter 13 allows filers to pay less toward low-priority debts—like credit card balances, medical and utility bills, personal loans, and back rent and leases—through the Chapter 13 plan. The bankruptcy court erases or "discharges" any remaining balances of these debts at the end of the Chapter 13 case.

Most filers make monthly creditor payments for five years, although some who qualify to file for Chapter 7 can pay into a three-year plan. This article assumes a five-year plan.

Learn how long Chapter 13 takes to complete.

Chapter 13 Filers Must Earn Enough to Keep Two Cars

Steady earnings are vital to a successful Chapter 13 case. How much income you'll need will depend on your debts and the property you own.

For instance, filers must pay high-priority debts like recently incurred taxes and unpaid domestic support payments in full. Also, mortgages, car loans, and other secured debt payments must remain current, or the lender will recover the house, car, or other property.

Property can also be a reason for a higher monthly Chapter 13 payment. Filers must pay creditors the value of "nonexempt" property—property not covered by a bankruptcy exemption—or more through the plan.

Example. When Charles was considering filing for Chapter 13, his take-home pay was $4,500 per month, and his reasonable living expenses were $3,500, leaving him $1,000 to pay creditors. However, he owed $60,000 in back taxes and had $30,000 of nonexempt vehicle equity. Because bankruptcy law required him to pay both debts fully, Charles would need to be able to pay $1,500 monthly ($1,500 x 60 = $90,000). Because he didn't earn a sufficient amount, the lawyer he consulted with explained that the bankruptcy judge would not approve or "confirm" a Chapter 13 plan.

When You Can Keep Two Vehicles in Chapter 13 Bankruptcy

You won't have an issue retaining both vehicles if you own both outright—you aren't making vehicle payments—and you can protect all the equity with a motor vehicle exemption, a wildcard exemption, or a combination of both.

This scenario works because it doesn't divert money to car loans that could pay other creditors. Also, filers who can fully protect all vehicle equity don't need to pay additional amounts to keep cars. As long as you can meet all other Chapter 13 payment requirements, you should be able to propose a plan the bankruptcy court will approve or "confirm."

Example. Chelsea owned a modest commuter car and an older motorcyle worth $7,000. Her state's bankruptcy exemption allowed her to protect or "exempt" $7,500 of equity in vehicles. Because she could fully protect all equity and wasn't making payments on either vehicle, keeping both didn't raise issues in her case.

When You Can't Keep Multiple Cars in Chapter 13 Bankruptcy

Typically, problems keeping property arise when filers have insufficient income to cover the mandatory Chapter 13 Plan payment. Because every person's financial situation is unique, the only way to accurately tell whether you earn enough to keep two cars in bankruptcy is by calculating the monthly amount required in Chapter 13.

Learn about qualification requirements in Chapter 13.

How to Calculate a Chapter 13 Plan Payment

Although bankruptcy lawyers use software for this calculation, you can get a rough estimate by following the relatively simple formula or more complicated approach outlined below.

Because Chapter 13 plan payments are complicated, you shouldn't rely on either approach before filing. Always consult a local bankruptcy lawyer.

Chapter 13 Plan Payment Shortcut

Lawyers can quickly rule out a potential client's ability to file a successful Chapter 13 case, and you can, too. It's accomplished by adding the items you must pay in Chapter 13 and determining whether you can afford to pay them:

• mortgage and car payments, including interest (although it might be at a lower rate) for 60 months, and
• overdue tax debt and domestic support obligations.

Not all factors are considered using this approach—only the most common—and it doesn't consider property. If you can't afford those two items, it's unlikely Chapter 13 would work for you. If you pass this quick assessment, try the more specific calculation method below.

Determining Your Chapter 13 Plan Payment

Here's what you'll do to more accurately determine whether you can support a Chapter 13 plan and keep the property you don't want to lose, including multiple cars.

1. Determine how much money you have to pay debts. Subtract your household expenses, such as rent, utilities, transportation costs, court-ordered support payments, and food, from your monthly net income. Don't deduct a mortgage, car payment, credit card bills, or other credit debts.
2. Subtract payments for homes, cars, and other secured debts. You must pay your mortgage, car note, and other secured debts or lose the property pledged as collateral. For this amount, calculate 60 months of mortgage and car payments for the property you'd like to keep (don't include the payment if you plan to give up the property). Also include payments for any secured property you'd like to keep. For instance, you might include business equipment if you're a sole proprietor. If less than 60 months of payments remain, use the balance owed plus the amount of interest that would accrue until paid. Add arrearages on all secured debts and the balance owed on lien amounts, such as tax liens. Subtract the total from the amount available to pay debts calculated above.
3. Calculate two additional figures:
   • Debts requiring full payment. If you're behind on a domestic support payment or income taxes incurred in the last three years, you must also pay the total owed (tax lien amounts belong in the category above, not this category). You'll also include all late-filed tax debt amounts in some states, such as California, and possibly fraud-related tax balances.
   • The value of your nonexempt property. Check the bankruptcy exemptions allowed in your state to determine whether all property is fully covered. If you can't protect everything, calculate your property's nonexempt equity.
4. Determine your payment. Subtract the larger of the two figures from the previous step. If you have enough income to cover all required Chapter 13 payments, you'll qualify to keep all property, including cars.

This barebones calculation doesn't consider all variables. Verify all amounts and calculations with a local bankruptcy lawyer. Learn more about calculating a Chapter 13 plan.

Reducing House and Car Payments in Chapter 13 Bankruptcy

In some instances, filers don't pay the entire balance owed on vehicles. For example, if you owe more than the car is worth, you might be able to reduce the amount you must pay to the car's value in a "cramdown."

This approach is available on other property types, including rental and vacation homes, which can significantly reduce a Chapter 13 payment. However, the catch is that the filer must pay the entire reduced balance through the Chapter 13 plan, which usually raises the monthly payment substantially.

Example. Maribel owes $12,000 on a car worth $6,000. If she meets all requirements, she can reduce the balance to $6,000 and lower her monthly Chapter 13 payment by $100.

Example. Corbi owes $180,000 on a small island rental that lost value after the last hurricane. He can reduce the amount owed to its value of $120,000 and own it free of any mortgage after completing Chapter 13. However, he'd have to pay the reduced value in full, which would be $2,000 per month plus interest in addition to other required amounts. Corbi can't afford the substantial cost and allows the rental to return to the bank.

Filers can make a similar reduction when a residential home is worth more than you owe. However, the requirements are more complicated because you can only strip "wholly unsecured" junior mortgages and home equity lines of credit (HELOCs). A mortgage or HELOC is wholly unsecured if no equity would be available to pay the loan.

Example. Shelby's house is worth $275,000, which is $75,000 less than she owes due to increased flooding risks in her area. Shelby's first mortgage is $250,000, and the second is $25,000. She can't strip either mortgage because neither is wholly unsecured. If she were to sell her home, both would receive payment. However, her $75,000 third mortgage is entirely unsecured because no money—not even $1—would be available to pay toward it. She can strip it in Chapter 13 and be free of it after completing her Chapter 13 case.

Learn more in Chapter 13 Bankruptcy: What If I Have a Lot of Equity in My House?

If You Still Can't Afford the Chapter 13 Payment

There aren't many other ways to make a Chapter 13 payment more affordable—especially while keeping property. The simplest is moving from a three-year payment to five years (although in this article, we have assumed a five-year payment). Another is to reduce expenses and free funds for required creditor payments.

The other methods involve property. If you're paying for a house or car, consider giving it back to the bank.

If you'd have to pay a higher payment because you can't protect property equity with a bankruptcy exemption, consider delaying your bankruptcy filing and selling the property. As long as you use the proceeds for your expenses before filing—in other words, don't try to hide the funds—you'll get the use of the capital and still qualify for bankruptcy.

You'll want to spend the money because protecting cash is difficult. Keep careful records of the transactions to prove you used the money for previous and current expenses. You can't pay bills like rent or utilities in advance because the trustee appointed to your case can recover such payments.

Example. Hector owned a nonexempt timeshare he no longer wanted. In Chapter 13, he'd need to pay $12,000 to keep it, an additional $200 monthly. After discussing the issue with his bankruptcy lawyer, Hector chose to sell the timeshare before filing and use the funds to repair one of his vehicles. The decision reduced his Chapter 13 payment to an affordable amount. Also, Hector could keep two reliable cars in his case, which he found essential, knowing he likely couldn't finance another vehicle during the five-year bankruptcy.

Learn more about lowering a Chapter 13 payment.

When a Trustee or Creditor Might Object to Two Cars

Proposing to keep and pay for multiple vehicles always raises the issue of reasonableness and good faith when creditors would receive less than the total amount you owe them. You can also expect an objection if your car payment seems high—especially on a luxury vehicle. The purpose of bankruptcy isn't to help filers sustain exorbitant lifestyles.

Two car payments would likely be allowed if married spouses worked, both incomes were necessary to support the plan, and the car payments were modest. An objection to multiple cars could be valid for a single filer who needed only one car to get to work. However, the single filer might defeat the objection if the vehicle payment is for the more reliable of the two.

When determining whether car payments are reasonably necessary and proposed in good faith, the court will consider factors such as your family size, commute distance to work and school, medical appointments, the make, model, and year of your vehicles, your monthly income, and the vehicles' financing arrangements.

Should You Keep Two Cars?

Even if you can keep two cars in Chapter 13 bankruptcy, doing so might not be your best decision. Be sure to consider whether your budget still allows for the cost of an additional vehicle, factoring in your monthly payment and expenses for gas, oil changes, car insurance, and other car repairs and maintenance.