When filing a Chapter 13 bankruptcy you must manage car loans in bankruptcy for 3–5 years after the bankruptcy court confirms the plan. But, whether you file a Chapter 7 or Chapter 13 you need to make a choice about your vehicles. Precisely, the choices are to keep or surrender your car to enable you to live within your budget.
How to Manage Your Car Loans in Bankruptcy
Of course, before you file your Chapter 7 or 13 bankruptcy you also need to ask how you will get to and from work for the next five years. That’s quite a few years in car age so you must also consider if you might need to replace the car during that time. However, as I always tell you, the decision should not be an emotional one. This is, instead, a financial decision that you make for the betterment of your family and your future.
If you currently lease or own a vehicle that is unreliable, then, you probably need to surrender the car in bankruptcy and get an affordable replacement. The same holds true if you currently own or lease a luxury car with high payments or maintenance. Again, you most likely must surrender the expensive car and get a more affordable replacement. However, keep in mind that you can always surrender a car in bankruptcy at the start of the case but you might not be able to surrender it later without problems.
Interestingly, when surrendering their cars, some of my clients keep the radio, battery, or tires. Especially if they are a recent purchase. Other clients also keep the carpet, engine, transmission, and seats which might not be reasonable but they keep them anyway.
On the other hand, sometimes we actually already have a good car with a reasonable price that is reliable. After all, that’s all we really need to get to and from work and the grocery store. So, if you have a good car you may try to keep it by “reaffirming”, “cramming down” or “redeeming” it.
In a Chapter 7 Bankruptcy
You can manage your car loans in Chapter 7 bankruptcy by reaffirming or redeeming a vehicle. If your budget shows that your vehicle is affordable then you might want to reaffirm the vehicle. In a reaffirmation, the lender sends your attorney the paperwork to keep the vehicle. You simply sign the reaffirmation and continue to make the payments. However, even if your budget does not show that you can make the payments sometimes people make the payments anyway and keep the auto.
However, if the lender later repossesses the car, they cannot sue you if you don’t sign a reaffirmation agreement. We rarely sign reaffirmations for that reason.
Next, if your car is a good car but you owe more than what it is worth you may redeem it and pay the cash value of the car. Then, the lender will release the lien.
Another option is the 722 redemption that provides for a different reliable auto if you need to replace a car or finance the redemption of your vehicle. However, they do have a high-interest rate. But, even though their interest rate is at 23% if you save half the cost of the car in principle it is still a saving.
With a reaffirmation, the payments are reported to the credit bureau. Conversely, without a reaffirmation agreement, the credit reporting agencies do not receive reports.
In a Chapter 13 Bankruptcy
Always remember that anything Chapter 7 does a Chapter 13 does better. Chapter 13 has special rules to help you manage car loans in bankruptcy. In Chapter 13 you surrender a vehicle but you may also reduce the amount of interest, often to less than 6%. In fact, in some cases, you may reduce the principle that you owe for a vehicle by cramming down the vehicle. What’s more, this action also involves the protection of a co-maker. Many people also often surrender their car loan in Chapter 13 if they owe a lot more than the car is worth. But you can cram down the car loan and only have to pay back what the car is worth in full if the car loan meets one of the following criteria:
- In use as a business vehicle
- Is over 910 days old
- You did not finance the purchase of the auto
The unsecured amount of the car loan is paid along with other unsecured creditors at the percentage paid to other unsecured loans. However, if the loan is not paying back the loan as fast as it’s depreciating the lender may also want the plan to increase the payments for the car with “adequate protection payments’. But, this might not increase your monthly payment in the plan and may only accelerate the repayment of the loan.
The Common Sense in Driving a Vehicle that You Fully Own
I enjoy the common sense approach of a certain Dave Ramsey video about making a car affordable. There is never a problem in managing your car loan when you save up the cash and you fully own the car. After all, a car is just something to get us to and from work safely and economically. No one “needs” a Shelby Mustang or F350 4×4 pickup truck to drop off the kids at school.
We are far better off driving a 3-year-old Ford with hail damage that gets 30 miles to the gallon and only costs us $150 per month. That’s in opposition to a Hummer that gets 10 miles per gallon and costs $900 per month. Believe me, the wife will appreciate dinner and date night in a 4-year-old Ford much more than a new Corvette with no food.
This is the kind of logic bankruptcy judges use when they look over your budget. You might not be able to keep the expensive motorcycle when you are trying to save a home. Instead, the creditors have to sacrifice a lot so, you have to tighten your belt a little.
If you need help in learning how to manage your car loan in bankruptcy, please give us a call today!
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Other Related Information
Louisville Kentucky Foreclosures and Your Options
Bankruptcy Motion 722 Redemption
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905
