Vehicle Loan Options In Bankruptcy
There are many ways to handle your vehicle loan in Bankruptcy depending on your situation; below is a summary of the options:
Chapter 7 Bankruptcy Vehicle Loan Options
1. Retain the Vehicle
- If you are current at the time of filing Bankruptcy, you can retain (keep) the vehicle and maintain (keep paying) the lien payments pursuant to your contractual obligations. As a general rule, you will need to be up to date on your payments in order to retain the vehicle in Chapter 7 unless the creditor otherwise consents.
- The creditor might ask you to sign a reaffirmation agreement, which your attorney can discuss with you.
- This might be a good option if your vehicle is reliable (not too old/ good condition/ reasonable mileage) and your payments are reasonable and affordable.
2. Surrender the Vehicle
- Give the car back to the lender (repossession).
- This might be a good option if you cannot afford the payments; it is an older vehicle; and/ or the vehicle is under water/ negative equity (you owe more on the vehicle than it is worth).
- Any deficiency judgment (amount owed after the lender liquidates the vehicle; vehicle lien balance less value/ sales price) will be included in your Bankruptcy discharge (debt forgiveness).
3. Surrender/ Trade-In the Vehicle for Newer Vehicle
- If you have an older unreliable vehicle, you might want to consider surrendering or trading it in for a newer vehicle if you can afford a vehicle payment. Proceed very cautiously and seek advise from counsel before incurring new debt leading into Bankruptcy, but it is sometimes a good, business judgment decision to go into the Bankruptcy with a newer, more reliable vehicle with an affordable monthly payment for the following reasons:
- It might easier to buy a newer vehicle before rather than after filing for Bankruptcy because the Bankruptcy might lower your credit score and might increase your interest rate. This is not always the case as sometimes it is easier to get a vehicle post-discharge (after Bankruptcy) as you should no longer have issues with your debt-to-income ratio. In that situation, you should not to sign a reaffirmation agreement, which your attorney can discuss further with you.
- The vehicle payment you are making on the newer vehicle will generate a positive mark on your credit each month which should help restore your credit faster after filing for Bankruptcy.
- A vehicle payment is a “good/ allowable expense” to have on the mean’s test and your monthly expenses.
- Having warranties on a newer vehicle may be available.
- You should have fewer repair costs with a newer vehicle
4. 727 Redemption
- You can redeem your vehicle under Section 722 of the Bankruptcy Code. This is where you pay for the value of the vehicle versus what you owe on the vehicle. This can be beneficial if your loan exceeds the value of your vehicle. For example, if your loan is $15,000 and your vehicle is worth $10,000, you can pay the creditor $10,000. There are many companies that offer 727 redemption funding but they usually have extremely high interest rates. You should check the payments, interest rate, fees etc. before going forward with this option.
Chapter 13 Bankruptcy Vehicle Loan Options
1. Retain the Vehicle
- If you are behind on your vehicle loan payments and you want to keep the vehicle, Chapter 13 Bankruptcy is most likely your best option. You will file a Chapter 13 Bankruptcy plan to reorganize the debt. You will need to make enough money to be able to make the normal monthly payments and catch up what you are behind through a 3-5 year Bankruptcy plan. Note: if you are behind on vehicle payments, the vehicle lender will usually repossess the vehicle very quickly. You can file Bankruptcy 13 to stop the repossession but you will need to file Bankruptcy before the vehicle is sold at auction in order to retain it.
- If you are current at the time of filing Chapter 13 Bankruptcy, you can keep the vehicle and keep making the payments pursuant to your contractual obligation just like in Chapter 7. Note: If you are filing Chapter 13 and your vehicle payment ends during the plan and/ or you have an interest rate over 5.25%, it might help (or you might be required) to pay for your vehicle through the plan. This is usually beneficial to debtors as it lowers the vehicle payment (extends the term at 5.5% interest). It does take longer to get the title (after your plan is complete) and can cause issues if you case were to be dismissed for some reason but otherwise this really helps debtors lower their vehicle expense.
2. Cram Down
- If you have owned your vehicle for over 910 days, you might be able to cram down the value in a Chapter 13 at a 5.25% interest rate over the 3-5 year Bankruptcy plan. This basically means you pay for the value of the vehicle rather than what you owe. The value will be is a secured claim which will be paid in full through your 3-5 year Chapter 13 Bankruptcy plan. The remaining balance will be an unsecured claim, which is paid at the same rate as other general unsecured creditors or simply discharged at the end of the case. If you otherwise would be a better candidate for Chapter 7, you will have to consider the trustee’s fees, the payment to the unsecured creditors and other factors (being in Bankruptcy for 3-5 years) to determine if this is more beneficial than a Chapter 7, but this is usually a tremendous benefit.
3. Surrender the Vehicle
- Give the vehicle back to the lender (repossession). You will do this through your Chapter 13 plan. This might be a good option if you cannot afford the payments; it is an older vehicle or the vehicle is under water/ negative equity (you owe more on the lien than the vehicle is worth); and you have not owned long enough to cram down. Any deficiency judgment (amount owed after the lender liquidates the vehicle) will be included in your Bankruptcy discharge.
- Surrender/ Trade-In for a newer vehicle: Like Chapter 7, if you have an older vehicle, you might want to consider surrendering or trading it in for a newer vehicle prior to filing Bankruptcy if you can afford a vehicle payment. Again, proceed very cautiously and seek advise from counsel before incurring new debt leading into Bankruptcy, but it is sometimes a good, business judgment decision to go into the Bankruptcy with a newer, more reliable vehicle with an affordable monthly payment for the same reasons listed under Chapter 7 above. In addition, if you file Chapter 13 Bankruptcy and during the plan your current vehicle becomes non-operational and you have to buy a new vehicle during the Chapter 13 and you have to borrow money to finance a new vehicle, you will have to file a Motion to Incur Debt with the Court, which may cause issues and cost additional attorney fees.
Note about Leased Vehicles in Bankruptcy: If you are leasing a vehicle, you can either assume or reject the lease in Chapter 7 or Chapter 13. If you assume the lease, you will keep making the payments. If you reject the lease, any deficiency/ balance owed will be included in your unsecured debts to be discharged. If you lease ends during your Chapter 13 plan, you will need to get court approval to lease or buy another vehicle. Basically any time you have to borrow money when you are in a Chapter 13 plan, you need to get court approval. It is a rather standard motion and takes about 30 days to get approval.
Note about Lien-Free Vehicles: This article discusses vehicles that are subject to a lien. If you have a lien-free vehicle, you may want to see this post
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