File under Chapter 7 if you don’t need lots of help keeping your vehicle. File under Chapter 13 if you do.
Many factors come into play in deciding between Chapter 7 and Chapter 13. As far as your vehicle loan is concerned, the above two oversimplified sentences simply reflect that this decision often turns on how far behind you are on your vehicle loan, and on how much you want to keep your vehicle.
Today’s blog is about how Chapter 7 and Chapter 13 each handle debts secured by your vehicle. The next blogs cover your home and other kinds of consumer collateral, like furniture and appliances.
Chapter 7—Limited Help for Your Vehicle
If you are struggling to make the payments but have managed to keep current on your car or truck loan, and want to keep the vehicle, Chapter 7 will usually give you the right amount of help. It’ll discharge (wipe out) most or all of your other debts so that you’ll be able to pay your vehicle loan more easily.
If you have fallen just a little behind—a month or maybe two—and want to keep your vehicle, Chapter 7 may still work for you. Almost always you will be require to get current on your vehicle loan very quickly—within a month or two of filing the bankruptcy case. So a Chapter 7 case is appropriate if it will improve your cash flow enough that you’ll be able to get current that quickly—and then pay consistently after that.
Regardless whether or not you are behind, Chapter 7 may allow you to save lots of money by “redeeming” your vehicle. If your vehicle is worth less than you owe on it, you can pay the amount of the vehicle’s value in a lump sum to the creditor, and then it must give you the vehicle free and clear. If you don’t have access to the money needed to redeem, you may be able to get a loan specifically for that purpose from a redemption loan lender. The interest rate would be relatively high, but the loan could be well worthwhile if the new amount financed is thousands of dollars less than your initial loan.
Regardless whether or not you are behind, if you have decided to surrender your vehicle to your creditor, Chapter 7 will discharge any “deficiency balance.” That’s the difference between how much you owed and how much your vehicle was sold for, often amounting to thousands of dollars.
Chapter 13—Serious Help for Your Vehicle
Chapter 13 gives you much more time than Chapter 7 does to catch up on your vehicle loan payments if you’ve fallen behind. Instead of giving you just a month or two to bring your loan current, Chapter 13 can give you years to do so. Your attorney proposes and the bankruptcy court approves a “Chapter 13 plan,” often after some input from the trustee and/or your creditors. That plan requires you to make monthly plan payments to the Chapter 13 trustee, a portion of which are earmarked for paying off the vehicle loan arrearage. In the meantime you and your vehicle are protected from repossession and any other collection action. You do have to hold up your end of the deal—consistently make the plan payments and the regular vehicle loan payments, keep insurance in place, and fulfill any other requirements under the plan.
If you got your vehicle loan more than two and a half years before filing the Chapter 13 case (more than 910 days before, to be exact), we can do a “cramdown” on that loan. This means that we can rewrite the terms of the loan, usually reducing the monthly payments (often significantly), reducing the balance down to the fair market value of the vehicle. We can usually reducing the interest rate as well. The end result is that you can pay thousands of dollars less for your car or truck, and own it free and clear at the end of your case. Cramdown is not available in a Chapter 7 case.
If your vehicle is worth much less than what you owe on it, and you qualify under the above 910-day rule, Chapter 13 may be worth considering even if you are current on your vehicle loan. Certainly if you are on the fence about which type of case to file, the benefits of a cramdown can swing the decision in favor of Chapter 13.
Important note: This blog has been about dealing with your vehicle loan lender, while assuming that any equity on the vehicle is fully protected by an exemption. If your vehicle is not fully protected, your attorney will talk with you about your options about that.