If you are filing a Chapter 13 bankruptcy you will need to manage car loans in bankruptcy for 3 to 5 years after the plan is confirmed. You need to ask how you will get to and from work for the next 5 years before you file your Chapter 7 or 13 bankruptcy and you may need to replace the car before you file. Whether you file a Chapter 7 or Chapter 13 you need to make a choice to keep or surrender your car to live within your budget. The decision should not be an emotional one. If you have a leased vehicle, or a car that is unreliable you probably need to surrender the expensive or junk car in bankruptcy and get an affordable and reasonable replacement. You can always surrender a car in bankruptcy at the start of the case but you may not be able to surrender it later without problems. If you are surrendering the car I have had some clients keep the radio batter or tires they just replaced. Other clients have kept the carpet, engine, transmission, and seats which may not have been reasonable but they kept it anyway. Sometimes we have a good car that reasonably and reliably gets us to and from work. If you have a good car you may need to keep it by “reaffirming”, “cramming down” or “redeeming” it.
In a Chapter 7 Bankruptcy
You can manage your car loan in bankruptcy by reaffirming or redeeming the vehicle. If your budget shows that you can afford your vehicle then you probably want to reaffirm the vehicle. In a reaffirmation the lender will send your attorney the paperwork to keep the vehicle if you ask for a reaffirmation. You simply sign the reaffirmation and continue to make the payments. With a reaffirmation the payments are reported to the credit bureau. If your budget does not show that you can make the payments you may often make the payments anyway and keep the auto. Without a reaffirmation agreement the payments will not be reported to credit reporting agencies. If you didn’t sign a reaffirmation you cannot be sued later if the car is repossessed. We rarely sign reaffirmations for that reason. If your car is a good car but you owe more than what it is worth you may redeem it and pay the cash value of the car and the lender will release the lien. 722 redemption will provide a different reliable auto if you need to replace a car or finance the redemption of your vehicle but they do have a high interest rate. Even though their interest rate is at 23% if you save half the cost of the car in principle it is still a savings.
Always remember that anything a Chapter 7 can do a Chapter 13 can do better. A Chapter 13 has special rules to help you manage car loans in bankruptcy. In a Chapter 13 you can surrender a vehicle but you may also reduce the amount of interest often to less than 6%, in some cases you may reduce the principle that you owe for a vehicle by cramming down the vehicle and you can protect a co maker. Car loans are often surrendered in a Chapter 13 if you owe much more than a car is worth. But you can cram down the car loan and only have to pay back what the car is worth in full if the car loan:
- Was for a business vehicle or
- Is over 910 days old or
- Did not finance the purchase of the auto the car may be “Crammed down”
The unsecured amount of the car loan is paid along with other unsecured creditors at the percentage paid to other unsecured loans. If the loan is not paying back the loan as fast as it is depreciating the lender may also want the plan to increase the payments for the car with “adequate protection payments’. This may not increase your monthly payment in the plan and may only accelerate the repayment of the loan.
Driving a paid for vehicle
I have always enjoyed the common sense approach of a certain Dave Ramsey video about making a car affordable. There is never a problem in managing your car loan when you save up the cash and the car is paid for. A car is just something to get us to and from work safely and economically. We don’t need a Shelby mustang or F 350 4×4 pickup truck to drop off the kids at school. We are far better off driving a hail damaged 3 year old Ford that gets 30 miles to the gallon and only cost us 150 per month than a Hummer that gets 10 miles per gallon which costs 900 per month. The wife will appreciate dinner and a date night movie in a 4 year old Ford much more than a new corvette with no food. This is the kind of logic bankruptcy judges use when they look over your budget. You may not be able to keep the expensive motorcycle when you are trying to save a home. Instead the creditors will have to sacrifice big and you will have to tighten your belt a little.