An excerpt from Bankruptcy: A New Beginning by Seth Hanson
I often get asked what happens to car loans in bankruptcy. Here is a rundown of some of the tools and approaches available in bankruptcy.
Chapter 13 Bankruptcy Cram Down
Chapter 13 bankruptcy allows us to cram down your car loan and convert the unsecured portion of the loan into general unsecured debt. This can be huge. For example, if you have a $20,000 loan on a vehicle that’s only worth $5,000, you can cram down the loan to the car’s true value ($5,000). In that case, the $5,000 debt would be paid at a modest interest rate over the course of the Chapter 13 bankruptcy plan and the balance of the loan would be given the same treatment as your credit card debt.
910 Day Rule
You can only do a Chapter 13 bankruptcy cram down on your vehicle loan if the loan is old enough. The car loan must have originated more than 910 days of filing bankruptcy. If you got your car loan less than two and a half years before filing bankruptcy, you won’t be allowed to cram down the car loan in Chapter 13 bankruptcy.
If you don’t want to keep paying on the car—because it is a piece of junk or is just too expensive—you can surrender the car with no strings attached. You can surrender the car to the lender through a Chapter 13 or a Chapter 7 bankruptcy. And yes, that means you will have to give the car back to the lender. Once you surrender the car to the lender, you will no longer be on the hook for insurance, registration, or making payments to the lender. Be sure to keep it insured and registered up until the lender takes the car.
In Chapter 7 bankruptcy you have the option of “redemption.” Redemption allows you to pay the lender the fair market value of the car and to discharge the loan balance. The difficulty with this option, though, is that you will need to find a new lender to give you a loan to make the redemption payment to the prior lender. And the new loan will often be at a high interest rate.
Reaffirmation is another option for Chapter 7 bankruptcy filers, but it’s risky. When you reaffirm a debt you are legally bound to pay the debt after bankruptcy. It will be as though you never filed bankruptcy on that loan. That means you are still on the hook to the lender if your car ever breaks down, you are in an accident where insurance doesn’t cover all the damage, or you lose a job or otherwise lose the ability to make car payments. In these situations, if you have reaffirmed the car loan the lender can sue you even after repossessing the car.
Retain and Pay
The option most preferred by my Chapter 7 clients is to keep the car and continue making payments to the lender. Most car lenders simply want to continue taking your car payment. That is how they make money. They do not want to be in the car repossession business.
Repossession is how they lose money. That is why even without a reaffirmation agreement car lenders almost universally continue to accept your car payments without repossessing your car. For clients who choose this option, I recommend that they call their car lender and personally inform them of their intent to continue making payments.
For more information contact your Fairfield bankruptcy attorney.
Categorized in: Loans