New Year Resolution #3: Deal Effectively with Your Car or Truck Loan
Both the Chapter 7 and Chapter 13 types of bankruptcy give you excellent ways to either keep and—if you want—safely let go of your vehicle.
If you are having trouble keeping current on your vehicle loan, it’s worth finding out how the two types of consumer bankruptcy—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts”—can help. You can get help on getting current and keeping current on your monthly payments, and in many situations you can reduce the amount of those payments. Or if it no longer makes sense to keep the vehicle, both types of bankruptcy can allow you to surrender it without owing anything on the vehicle loan. Here’s how they can each help.
In a Chapter 7 case:
- Immediately stop your car or truck from being repossessed by your vehicle lender, giving you at least a little time to catch up on the late payments, although usually no more than a month or two.
- “Discharge”—legally write off—your other debts so that you can afford to make your vehicle loan payments.
- Keep your vehicle by “reaffirming” the loan—agreeing to favor the loan by legally excluding it from the discharge of other debts.
- “Redeem” your vehicle for less than what you owe on it if it is worth less than the loan balance, by paying no more than its fair market value in a lump sum, either by
- coming up with that amount yourself (such as from a family member or friend), or
- entering into a new redemption loan with another lender to pay that fair market value to your original lender.
- Surrender your vehicle about a month after filing your Chapter 7 case, in an orderly way instead of abruptly by repossession, and then discharging (writing off) the entire “deficiency balance”—the often substantial amount you would owe when letting a vehicle go back to the lender outside of bankruptcy.
In a Chapter 13 case:
- Immediately stop your car or truck from being repossessed by your vehicle lender, to give you a year or two to catch up on the late payments, much longer than in a Chapter 7 case.
- If your vehicle loan is more than 910 days old (about 2 and a half years) and the vehicle is worth less than the loan balance, you can “cram down” the debt, often substantially reducing both the monthly payment and the total you would pay for the vehicle before it would be yours free and clear.
- Even when you can’t do a “cramdown,” you can greatly reduce what you are paying on other debts so that you can better afford the vehicle payments.
- Prevent a future vehicle repossession because in a Chapter 13 case substantial protection from your creditors continues throughout the 3-to-5-years that a case lasts.
- If your financial circumstances worsen during a Chapter 13 case, you would likely be able to adjust the amount you are paying to your creditors, again better enabling you to keep your vehicle.
- If you decide at the beginning of the case that you don’t want your vehicle, you can surrender it then. If there is a “deficiency balance” (the amount you would owe after the lender credits the amount it re-sold the vehicle for after taking possession of it, after subtracting any costs of repossession and sale), that gets wrapped into your Chapter 13 case (instead of you being sued for it); this often does not add anything to the amount you pay to all of your creditors in your case.
- You can change your mind about a vehicle loan during the course of a Chapter 13 case, deciding a year or two or more after the start of your case that you no longer want to keep paying on a vehicle which you originally intended to keep, allowing you to adjust your Chapter 13 payment plan accordingly, or converting that case into a Chapter 7 one if that is better for you at that point.
- Regardless whether you keep your vehicle or surrender it, at the successful end of your Chapter 13 case you would owe nothing on that vehicle loan.