The second scenario, the Chapter 13 solution for keeping a vehicle if you’re behind on payments.
In our last blog posts we showed how Chapter 7 “straight bankruptcy” can make it possible to keep your vehicle even if you were behind on your payments. We showed how this can work in practice through an example.
But hanging onto a car through Chapter 7 when you’re behind only works in limited circumstances.
In a Chapter 7 case you would very likely need to get current on the loan quite quickly—within about 30 to 60 days—or there’s a good chance your lender wouldn’t let you keep the vehicle. Also, you would very likely have to “reaffirm” the debt—continue being legally liable on it. That means that the vehicle loan would be excluded from the “discharge”—the legal write-off—of your debts. So if your vehicle was worth less than the debt amount, you could be left owing a large debt after you case was over if you would be unable to make loan payments and the vehicle was repossessed.
The following scenario describes how Chapter 13 can solve these and related shortcomings.
Danielle owns a 2009 Ford F-150 STX pickup that she bought used 32 months ago. She owes $12,000 on it, with monthly payments of $389. It’s in decent condition, worth about $9,000. She absolutely needs it to get herself to and from work.
She’s nearly 3 months behind on this truck loan because she got injured in a vehicle accident while a passenger in a friend’s car. She couldn’t work for several months and so she lost her job. The friend was driving uninsured, so Danielle got very little money for her medical expenses and lost income. She was out of work for 8 months until she got another job two months ago. She’s still way behind on her credit cards, her medical bills, and on her other debts, partly because she first had to catch up on her apartment rent to avoid being evicted.
Danielle has been advised that with the amount of debt she owes, she needs to file bankruptcy. She’s trying to choose between Chapter 7 and Chapter 13.
The Chapter 13 Solution
Although Danielle has been at her new job only 2 months and doesn’t make quite as much as at her prior job, it’s with a very reliable employer. But she has absolutely no way to come up with the now nearly three months of $389 in vehicle payments– $1,167—in the next couple months after filing bankruptcy. And even if she didn’t have to pay most of her debt payments each month, she’d have trouble coming up with the $389 monthly payment. Also, she owes $6,000 in income taxes for 2013 and 2014 and has no idea how she’s going to pay that.
She’s advised by her attorney that through Chapter 13 she could do a “cramdown” on her truck loan, in effect re-writing that loan so that she would not have to catch up on the missed payments. It would also lower her interest rate, stretch out and reduce her payments from $389 to $195 per month, and reduce how much she would have to pay on the loan overall by almost $3,000.
She also learns that instead of paying that $195 to the vehicle lender directly she would pay that as part of a single Chapter 13 monthly payment plan amount that would take care of ALL of her creditors, including her income taxes. She would not have to pay any more ongoing interest or penalties to the IRS and her state tax agency on the $6,000 she owes them, and they would be prevented from taking any action against her, such as garnishing her wages or checking account.
Her monthly plan payment amount would be $400 per month—to take care of her truck loan, the income taxes, all her other creditors, and even her attorney fees—over the course of about 4 and a half years. Her budget shows that she can very reasonably afford that single payment. At the end of that time she would have paid everything she needs to pay on her truck “cramdown,” paid off her income taxes, and a small portion of the rest of her debts. Danielle would receive her title to her free and clear pickup truck, would be free of her tax debt, and would be altogether debt-free.
Danielle, not surprisingly, decides to file a Chapter 13 case.