How Chapter 13 Bankruptcy Affects Your Car

by
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC

“If I file for Chapter 13 bankruptcy, can I keep my car?”

Yes.You are permitted to keep all of your property, even your nonexempt assets. None of your property is sold to pay your creditors. Instead, you set up a repayment plan and pay money to the Chapter 13 trustee. But if you have nonexempt equity in your vehicle, you are required to pay your unsecured creditors the amount equal to your nonexempt equity through your repayment plan.

“How do I pay my car loan in Chapter 13 bankruptcy?”

At the beginning of a Chapter 13 bankruptcy, you create a repayment plan in which you propose to pay back part or all of your debts over a period of three to five years. Your bankruptcy normally erases your liability on a car loan but the lender still has a lien on your vehicle. This means the lender has the legal right to repossess the car unless you continue to make payments. So in your repayment plan, you make your monthly car payment to the bankruptcy trustee, which he sends to the car’s lender.

“What if I was behind in my car loan payments before the bankruptcy?”

Once you file Chapter 13 bankruptcy, the court issues an automatic stay. This means your lender cannot repossess your car or conduct any other type of collection action against you. The lender then files a “proof of claim” with the bankruptcy court, which shows how much you owe including any back payments. Unless you object to the claim or reduce the amount you owe with a loan cramdown, you will pay the entire principal balance through your plan.

“Can I reduce the principal balance of my car loan to the car’s fair market value in a Chapter 13?”

Maybe, under certain conditions. This is called a car loan cramdown. This may also permit you to lower the interest rate of your car loan, too. If you qualify for a cramdown, you pay the lender the value of your car through your Chapter 13 repayment plan. The remaining loan balance is considered unsecured and erased at the end when you receive your bankruptcy discharge. For Example: Let’s say your car is worth $8,000 and your loan balance is $12,000. If you qualify for a cramdown, you may be able to pay the lender $8,000 through your Chapter 13 plan, own your car free and clear, and have the other $4,000 eliminated at the time of your bankruptcy discharge.