Keeping Your Car in a Chapter 13 Bankruptcy
The amazing part about a chapter 13 bankruptcy is you can keep everything you own. If you have a lot of very valuable assets, your monthly chapter 13 plan payment might be higher, but at least you get to keep all your assets, while eliminating your debt!
While there are many chapter 13 topics to discuss, this blog post will be about keeping your car in a chapter 13 bankruptcy. Unlike the chapter 7 “liquidation,” a chapter 13 bankruptcy is a “reorganization” of your debts. This means, among other things, that you need not worry about your car being taken by the bankruptcy.
Various considerations regarding your car in a chapter 13 bankruptcy:
Chapter 13 bankruptcy has a lot of power to help you reorganize your debts. One of the most impactful powers on many individuals in our society is the power to “cram-down” a vehicle. What this means is that you “pay what the vehicle is worth, rather than what you still owe on it.” And by the way, the repayment is spread out over 5 years (60 months)! This amazing benefit is available on loans that are older than 910 days, or any non-PMSI loan (i.e. title loans, etc.).
For example: You own a vehicle worth $10,000 but you still owe $15,000 on the loan (more than 910 days old). Your current payment is $430/mo. With the chapter 13 “cram-down” power, your new payment through the chapter 13 could be as a low as $199/mo (including your other debts!).
Another great benefit of a chapter 13 bankruptcy is the ability to effectively re-finance your car. You might be stuck in a 25% loan @ $450/month. But a chapter 13 bankruptcy can reduce the interest rate to about 5%, and spread out your remaining balance over 60 months!
For example: You owe $6,500 on a vehicle, $450/mo @ 25%. This is probably putting a lot of stress on your budget. With the Chapter 13 bankruptcy, the loan would be reduced to about 5%, and the balance would be spread out over 60 months! This means your new chapter 13 payment, including your other debts, could be as low as $129/mo!
The way that equity is considered in a chapter 13 bankruptcy (vs. a chapter 7 bankruptcy) is by affecting how much money you must pay to your creditors. The calculation of how much you owe to your creditors is the same unexempt equity calculation from my last blog (“Keeping Your Car in a Chapter 7 Bankruptcy”). However much unexempt equity is in your car, that amount is required to be paid to your unsecured creditors. The reason for this is rooted in one of the mantras of Chapter 13: “Chapter 13 unsecured creditors must get at least as much as they would receive in a chapter 7 liquidation.” And because the unexempt equity is recovered in a chapter 7 liquidation (through the “buyback,” or sale at auction), then it must be accounted for in a chapter 13.
The Chapter 13 accounts for the unexempt equity in a much less drastic way, however; the chapter 13 simply requires the unexempt portion be paid over a period of 60 months.
For example: Using the same example from my last blog post. Your car has $7,500 of equity. I can exempt (“protect”) the first $5,025 of the equity, but the remaining $2,475 is unexempt. The chapter 13 is only going to require that this $2,475 unexempt portion be repaid over 60 months, or $41.25/mo. This means your chapter 13 payment could be as low as $45/mo (after considering various trustee fees, etc. associated with administering a chapter 13 plan). You could get rid of all your tens of thousands of dollars in credit card, medical, etc. DEBT for only $45/mo in this example! AND YOU GET TO KEEP YOUR CAR!
Surrendering Your Car
If none of the above options are appealing to you, you can always choose to surrender your car (especially if it has significant negative equity, and the loan doesn’t qualify for the “cram-down”). Surrendering your car means you agree to return it to the financing company, and the deficiency balance will only be paid as an unsecured debt, which is oftentimes only at a rate of 1%!!!
For example: You surrender your car in a chapter 13 bankruptcy. The car is worth $10,000 and you still owe $15,000 on it. The car is sold at auction and $5,000 is remaining unpaid on the loan. This $5,000 deficiency is lumped in with the other unsecured creditors and can get as low as 1% = $50 TOTAL! That means you would only have to pay the car company $50 TOTAL (or $0.83/month) in the chapter 13 bankruptcy!
Truly amazing benefits!
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