Straight Chapter 7 bankruptcy gives very limited help if you’re behind on your vehicle and need to keep it. And Chapter 13? Provides much more help.
The last blog was about what happens after preventing your vehicle from getting repossessed by filing a Chapter 7 case. Today’s blog is about what happens if instead you file a Chapter 13 case, the payment plan type of bankruptcy.
Back Payments
If you are worried about a vehicle repossession, you are likely a month or two behind on your loan payments. Assuming you need to keep the vehicle, if you were to file a straight Chapter 7 case you would very likely be required to catch up on your back payments within a month or two after filing the bankruptcy case. Since you also need to resume making the regular monthly payments and keep current on them, catching up on the back payments at the same time and this quickly is impossible for many people.
With Chapter 13, in contrast, you either don’t have to catch up on the back payments at all or at least would likely have many months to do so.
“Cramdown”
If your loan is more than two and a half years old, and you owe more on the loan than the value of your vehicle, you can do a “cram down”—re-write the loan to reduce the portion of the loan that must be paid in full down to the value of the vehicle. The remaining amount of the loan—the unsecured portion above the value of your vehicle—is then paid the same as the rest of your unsecured creditors, often at a steep discount in your favor. In some jurisdictions, you may pay little or nothing on this unsecured portion.
As part of the re-writing of the loan in a “cram down,” you can often also decrease the interest rate and/or stretch out the payments for a longer term, all of this usually resulting in a significantly reduced monthly payment.
Option to Surrender, Now or Later
Under Chapter 7, you must pretty much know at the time your case is filed whether you want to keep or surrender the vehicle. You sign a document called “statement of intent” which is filed at court usually at the start of your case. And then very quickly after that you need to put that intention into action. If you are surrendering the vehicle, you would need to do so within about a month after filing the case.
In Chapter 13 as well, your court-filed documents indicate your intentions, most directly in your formal plan. The plan states how much you intend to pay, and which creditors are to receive how much, including the vehicle loan creditor(s). It is prepared by your attorney, approved and signed by you, and presented to the court for the judge’s “confirmation.”
If you decide through the advice of your attorney that it’s in your best interest to surrender the vehicle, then your Chapter 13 plan will not propose to pay anything to the secured portion of the debt. Instead after you surrender the vehicle, the creditor will sell it, credit the sale proceeds to the balance, and report to the bankruptcy court how much it is still owed. Just as stated above, that unsecured amount will be added to the rest of your unsecured debt, and paid whatever percentage the rest are being paid. But in most cases the amount being paid by the debtors towards the pool of unsecured debt does not increase. Instead that amount is just divided differently among all the unsecured creditors.
Unlike Chapter 7, Chapter 13 gives you some flexibility if you decide later that you can’t or chose not to maintain the payments on the vehicle. You can change your mind a year or two into the Chapter 13 case, deciding to surrender your vehicle after all, or even to convert the entire Chapter 13 case into a Chapter 7 one. These changes would add to the costs of your case and have other financial consequences, so they should not be planned for or done lightly. But having this kind of flexibility can be quite important in some situations.