If you are a few years into your car loan and realize that your car is worth less than what you still owe, you are in luck. Filing Chapter 13 bankruptcy and paying your car lender through your Chapter 13 plan can save you hundreds or even thousands of dollars on your car. When your Chapter 13 plan is complete, you own your car having paid far less for it.
Chapter 7 Bankruptcy vs Chapter 13 Bankruptcy
Chapter 7 bankruptcy is a four- to six- month process by which the Chapter 7 Trustee and the court analyze a debtor’s income, expenses, assets, and debts, and grants a debtor a “discharge” of unsecured debt. This means the debtor is no longer personally liable for those debts.The most common reasons people file bankruptcy under Chapter 7 is that they lost their job, or their finances have suffered from divorce or medical bills they cannot pay. Chapter 7 debtors must pass the “means test” which determines whether they are income-qualified to file under Chapter 7. If they earn too much income to qualify for Chapter 7, they can file under Chapter 13 and pay unsecured creditors a portion of what is owed.
Chapter 13 is quite different from Chapter 7, although the debtor makes the same disclosures about income, expenses, assets, and debts. A Chapter 13 debtor and his or her attorney will also file a proposed plan outlining what creditors the debtor intends to pay and how much. The proposed plan will last either three or five years, and when the debtor finishes making monthly payments to the Trustee, the plan is complete and the debtor is discharged of any remaining unpaid debt.
Chapter 13 bankruptcy is very powerful, in that a debtor can have more kinds of debt discharged than in Chapter 7, and that secured creditors like mortgage lenders and car lenders must accept payments under a confirmed plan. Debtors can use Chapter 13 to catch up on mortgage or car loan arrears, or “cram down” their car loan.
What is Chapter 13 Car “Cram Down?”
“Cramdown” is the term used to describe the process by which a Chapter 13 debtor forces the car lender to accept less than what the debtor owes on the loan in full satisfaction of the debt. In other words, a Chapter 13 debtor will pay far less than what he or she owes on the loan, and at the end of the Chapter 13 plan, he or she will own the car.Before filing bankruptcy, the debtor and his or her attorney will come up with a valuation of the car. This will be the car’s retail value in the month the debtor files Chapter 13. Usually, valuation starts with referring to the NADA Guide or the Kelley Blue Book retail value for the make, model, and year of the car, then adjusting it for condition and mileage. The debtor will list this value in the proposed Chapter 13 plan, as well as a proposed rate of interest, which will be prime plus 1-3%.
When the plan is filed, the car lender receives notice that they are being crammed down, and they have the opportunity to object to the proposed valuation, the proposed rate of interest, or both. Many times the debtor’s attorney can work it out with the lender, however, if the lender will not compromise there will be a hearing before the bankruptcy judge and the judge will determine the value and interest rate.
Either way, the car’s value with interest will be paid by the debtor over the course of his or her three- or five-year plan. Each month the debtor will make payments to the Trustee, and in turn, the Trustee will pay the lender. If the debtor makes all plan payments in full and on time, the debtor receives a discharge of any remaining debt and owns the car free and clear.
The reduction in interest alone saves a Chapter debtor hundreds of dollars. Coupled with the cram down to retail value, a Chapter 13 debtor can potentially save thousands on the purchase price of their car.
What if I Just Can’t Afford My Car?
You can surrender it to the lender in either Chapter 7 or Chapter 13. The lender will sell it at auction and apply the auction proceeds to your loan balance. Chances are there will be a deficiency, as it is rare that a car will sell for more than what is owed on the loan. This deficiency is discharged as unsecured debt in your bankruptcy filing.If you are struggling to make your car payments and want to know what options are available to you, speak with an experienced bankruptcy attorney. Together you can crunch the numbers and determine whether Chapter 7 or Chapter 13 bankruptcy is for you.
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