You can save your vehicle with Chapter 7 if you can quickly catch up. But if you can’t, consider Chapter 13.
Two Ways to Permanently Keep Your Vehicle
In our last blog post we showed how to keep your vehicle if you are behind on your vehicle payments AND want to keep the vehicle, by filing a Chapter 7 “straight bankruptcy.” Today we show how Chapter 13 “adjustment of debts” provides a more flexible and powerful tool for accomplishing this.
Making the Decision between Chapter 7 and 13
Like in the last blog post, consider these two questions:
1) Can you get current on the loan within about two months after filing bankruptcy, after no longer having to pay your other debts?
2) Did you buy and finance your vehicle more than 910 days (about 2 and half years) ago?
If the answer to the first question is “yes,” and especially if the answer to the second question is “no,” then Chapter 7 is likely right for you (at least as far as your vehicle loan is concerned).
But if the answer to the first question is “no,” and especially if the answer to the second question is “yes,” then you likely need and would benefit from the bigger help of Chapter 13.
The Big Advantages of Chapter 13
That’s because, as to the first question, Chapter 13 gives you more time to catch up on late payments, usually allowing you to stretch them out over many months, or even several years. That’s much, much longer than the couple months that Chapter 7 gives you.
And as to the second question, if your vehicle was bought and financed more than two and a half years ago, you may not have to catch up on late payments at all. And you may be able to significantly lower your monthly payments and pay thousands of dollars less for your vehicle before owning it free and clear.
Stretching Out Back Payments
Under Chapter 7, if you are behind on your vehicle loan when your case is filed, in most situations you will have to bring your account current within the following month or two in order to keep your vehicle.
Under Chapter 13, almost always your arrearage (the amount you are behind) can be repaid in small monthly installments covering many months, or even several years. This is a tremendous benefit if you simply don’t have the money to pay the arrearage quickly, on top of the ongoing regular monthly payments.
This is even more helpful if you have other important debts competing for your precious money each month. For example, if you are behind on child support or on your home mortgage, or if you owe income taxes or student loans which will not be discharged (legally written off) in bankruptcy, it would be all the more difficult to find the money to catch up on your vehicle arrearage. Under Chapter 13, all of these pressing creditors can be forced to patiently wait their turn while you pay what you need to pay eventually, including your vehicle arrearage, based on what your budget allows.
“Cramming Down” Your Vehicle Loan
And even better, you never have to catch up on your vehicle loan arrearage if your loan is at least two and a half years old and you owe more on the vehicle than it is worth.
Then you can do a “cramdown.” In effect your vehicle loan is re-written, divided into two debts: the “secured debt,” based on the value of your vehicle, and the “unsecured debt,” the remaining amount. Your vehicle loan is sensibly considered “secured” up to the value of its collateral, and unsecured beyond that. Your new monthly payment—often much lower than the loan’s regular payment—is calculated based on paying off the “secured debt” during the life of your Chapter 13 plan (a maximum of 5 years), often at a lower interest rate. The “unsecured debt” is put into the pool of all your other “general unsecured debts,” often to be paid pennies on the dollar, and sometimes paid nothing at all.
As a result, you do not have to catch up on any arrearage, usually your monthly payment is less, often much less, and the total you pay on your vehicle loan is less, often thousands less.