This big-picture guide will give you an in-depth look at how vehicles with loans are treated in a Chapter 13 bankruptcy. Addressing the issue involves two separate topics: whether you can keep your vehicle; and how car loans are treated in your case.
Whether you can keep your vehicle
In a Chapter 7 bankruptcy case, you can lose your vehicle if you have more equity than you can exempt. However, in a Chapter 13 bankruptcy, you can still keep your vehicle even though it is over-exempt. It just means that you will have to pay that extra amount that is over-exempt to your unsecured creditors.
For example, if your vehicle is worth $20,000, has a loan balance of $15,000, and the North Carolina vehicle exemption of $3,500 is applied, you will have $1,500 of non-exempt equity left over for your vehicle. The nonexempt equity of $1,500 is the minimum amount you will be required to pay to your unsecured creditors in your Chapter 13 plan. This works out to about $25 per month over the course of a 60-month plan Chapter 13 plan. There are other factors that determine how much your unsecured creditors have to be paid, and the length of time you have to pay them, but that will be a topic for another post.
How your loan is treated
Next, we deal with how your vehicle loan itself is treated. A Chapter 13 bankruptcy case offers four main options:
- Pay the lender directly
- Pay through trustee
- Cram down
Each choice has positives and negatives, though each option may not be available for your particular situation.
Not everyone wants to keep their vehicle when they file bankruptcy. Surrendering your vehicle allows you to give the vehicle back to the lender. This can be a great option in some circumstances:
- You have a vehicle that is in need of major repairs;
- You have a second vehicle that you no longer need;
- You have a vehicle that no longer serves the purpose that you bought it for, such as a work truck or a passenger van.
The advantage of surrendering the vehicle is that you do not pay for the full amount of the loan or worry about selling the vehicle yourself. The lender will have to resell the vehicle, and whatever is left of the principal loan balance is paid pennies on the dollar as an unsecured debt.
2. Pay the Lender Directly
If you are current on your vehicle loan, you may be able to just continue making monthly payments directly to the lender. The original terms of the loan are not changed, so the length of the loan, interest rate and principal balance will stay the same. This can be a good option if you have a low interest rate loan on a newer vehicle.
However, there are some restrictions in order to use this option if you are filing bankruptcy in the Western District of North Carolina (other districts may have different local customs, and this firm only files cases for the Asheville and Bryson City division of Western North Carolina). You must be current on your loan payments and the last payment on your loan must be due after the last payment under your bankruptcy plan. Stated simply, if you have six years left on your loan and your bankruptcy plan will last for five years, you can use this option. You may also use this option if there is a cosigner on the loan and the cosigner is not filing a joint bankruptcy case with you (only spouses can file joint cases).
3. Pay Through the Trustee
The most common method of dealing with your car loan is to pay it though your Chapter 13 plan with the trustee paying the lender. Instead of you paying the lender directly, the trustee pays the loan from a portion of your monthly plan payment. This option modifies the interest rate to the prime interest rate, plus an additional 2%. Also, your vehicle loan will be paid off at the end of your bankruptcy case and you will own the vehicle free and clear from the loan. However, it does not reduce the amount of principle you pay on the loan. In some circumstances, paying your loan through the plan can be more advantageous than the paying the lender directly:
- If you are shortening the length of your loan, your lender will get paid quicker than it otherwise would. However, instead of increasing the amount you have to pay to the trustee, it may come at the expense of your unsecured creditors by reducing the amount that they are repaid.
- Paying your loan through the plan helps to minimize disputes in your case. If you are paying the lender directly and you miss a few payments, the lender may ask the court for permission to repossess the vehicle. However, if you are paying it through your plan and you miss a few payments to the trustee, the lenders will typically skip asking the court for relief and instead rely on the trustee to require you to increase your payment amount to make up the difference.
4. Cram Down
If you owe more than your vehicle is worth, a “cram down” can save you thousands of dollars in your bankruptcy case. If your loan meets certain criteria, this is a great option to explore. Your vehicle loan is paid through the plan, but with the added benefit of reducing the principal amount due on the loan. What your lender is paid will be split into two parts. The first part is based on the fair market value of your vehicle. This is the “secured” portion of the loan and is paid in full with interest. The second part, the “unsecured” portion, is the remaining portion and is paid at the same percentage as your other unsecured creditors.
For example, if you have a car loan with an outstanding balance of $10,000 but the car’s current retail value is only $6,000, then the lender is paid only $6,000 with interest. The lender may only be paid 10% for the remaining balance, or $400, and without interest. After you make all of your bankruptcy plan payments and receive a discharge, you will own the vehicle free of the lien. However, a “cram down” is only available in limited circumstances:
- If the loan was a “purchase-money” loan, meaning you obtained the loan at the same time you purchased your vehicle, you can’t cram down your loan unless you obtained the loan 910 days (about 2.5 years) prior to when your case is filed. For example, if on January 1, 2018 you obtained a loan to purchase a vehicle, you would have to wait until June 30, 2020 before the loan is eligible to be crammed down.
- If you used a vehicle that you already owned as collateral for a loan (like a title loan) or if you refinanced an existing vehicle loan into a new loan, you do not need to wait 910 days to take advantage of the cram down.
As you can see, you won’t lose your vehicle just because you file Chapter 13 bankruptcy. If you want to surrender your vehicle, you can. But, if you want to keep it, your Chapter 13 plan will offer you a solution, provided that you can pay the amounts required. Are you curious about how your vehicle will be treated in a Chapter 13 bankruptcy? Call 828-412-8700 today to see what solution works best for you.