Chapter 13 protects you while you catch up on your vehicle loan, or you may not need to catch up on that loan at all.
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Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. Chapter 13 gives you many months, or even a couple years, to catch up. And if you got your loan more than two years and a half years ago, and you owe on it more than the vehicle is worth, you probably won’t even have to catch up on any missed payments. And you will likely pay less per month, and pay less on the loan overall until you own it free and clear.
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The last blog showed how Chapter 7 can help with three special debts–income taxes, child and spousal support arrears, and home mortgage arrears—and how Chapter 13 can help more if what Chapter 7 does is not enough. Today’s blog is about another special debt—vehicle loans that are not current.
The Law of Vehicle Loans Arrears
A vehicle loan is in effect made up of two commitments you’ve made to your lender:
- a promise to pay a certain amount each month, plus interest, until the debt is paid off
- a lien on the vehicle, giving the lender a right to repossess your vehicle if you fail to keep your promise to pay
If right before filing bankruptcy you were behind on your vehicle payments, your lender would have the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay” stops any repossession. This protection lasts as long as the bankruptcy case is open, unless the lender files a motion to get “relief from the automatic stay” and gets earlier permission to repossess.
Vehicle Loans in Arrears in Chapter 7
A Chapter 7 case is open usually for three, four months, so that is how long you have protection from repossession if you are not current on your payments. As just mentioned, this period of protection could be shorter if in the meantime the lender files a motion requesting that and prevails on that motion.
If you are not current on your vehicle loan at the time your Chapter 7 case is filed, but can get current before the automatic stay expires, then Chapter 7 is likely a good option (at least as far as that loan is concerned). In practice, that usually gives you about two months or so immediately after the bankruptcy filing to catch up. You don’t usually get the full three, four months that the case is open because the lenders tend not to allow it. That’s because after you catch up the lender has to prepare a document called a reaffirmation agreement, which you must sign and is then filed at the bankruptcy court, all before the case closes.
So simply put, if you are not current on a vehicle loan and want to keep that vehicle, a Chapter 7 would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the likely practices of you lender when you discuss your vehicle loan options.
Vehicle Loans in Arrears in Chapter 13
Just as simply put, if you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you. In most situations you would be allowed to catch up over a period of many months, potentially even a few years.
In some situations you may not even need to catch up at all. This happens if, and only if, 1) you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and 2) your vehicle is worth less than your debt against it. If so, you will not only NOT need to catch up on the loan, you will usually be able to pay a lower monthly payment, often a lower interest rate, and less on the loan overall, and then you will own the vehicle free and clear at the end of the case.
This is informally called a vehicle loan “cramdown,” and can ONLY be done under Chapter 13, not under Chapter 7.
Even if you are current on your vehicle loan, or could catch up within two months or so, and therefore would likely be able to keep your vehicle under Chapter 7, IF your vehicle is worth significantly less than what you owe on it you should talk with your attorney about how much money a Chapter 13 could save you through a “cramdown.” This might especially make sense if Chapter 13 also helps you in other ways.