How Bankruptcy Deals with Your Vehicle Loan if You Want to Keep Your Vehicle
Chapter 7 and Chapter 13 both help you pay your vehicle loan and keep your vehicle, each in their own way.
Paying Your Vehicle Loan Under Chapter 7
The main benefit of filing a Chapter 7 “straight bankruptcy” case as far as your vehicle loan is concerned is that you will be much better able to afford to pay it. That’s because you will likely be able to write off (“discharge”) most or even all your other debts, leaving you with more money each month to pay your vehicle loan.
Under Chapter 7 you have the option to keep your car or truck and continue making payments on it until it is paid off, or to surrender it and owe nothing more on the loan because any remaining balance is discharged along with the rest of your debts.
If you want to keep the car or truck, you almost always must “reaffirm” the debt, meaning you must sign a “reaffirmation agreement.” That makes you liable on the debt in spite of your bankruptcy filing. A “reaffirmation” excludes the vehicle loan from the discharge of your debts. This means that if at some point in the future you couldn’t make the payments and the vehicle was repossessed, you would likely still owe part of the debt—a repossessed vehicle is seldom sold off for at high enough of a price to cover the full debt amount.
But after all, that is the risk you take with any vehicle loan, that if you can’t make the payments the vehicle would be repossessed and you’d probably still owe part of the debt. Under Chapter 7, you have the opportunity to decide one more time whether that risk is worth the benefits of having the vehicle. After discharging all or most of your other debts you may well be in a much better position to pay the monthly payments—as well as the vehicle’s gas, maintenance and insurance—than when you first bought the vehicle.
Paying Your Vehicle Loan in a Chapter 13 “Adjustment of Debts”
Under Chapter 13 you have more protection from your vehicle creditor than under Chapter 7,and also may be able to reduce the monthly payments and the total amount needed for paying off your vehicle loan.
The greater protection comes from the reality that Chapter 13 cases last so much longer than Chapter 7 ones—usually 3 to 5 years instead of only about 3 months. Thus the “automatic stay”—the law that prevents repossessions and other collection activity—can be in effect that much longer. It’s not that your vehicle couldn’t possibly get repossessed in a Chapter 13 case, but the creditor would first have to ask permission from the bankruptcy court, a procedure which would at the least give you and your attorney a chance to work something out with your creditor.
And if your vehicle loan is more than two and a half years old and you owe on it more than the vehicle is worth, you can do a “cramdown”—re-write the contract so that in effect the new loan principal is the amount of the vehicle’s value. Plus you can often reduce the interest rate, sometimes stretch out the payments, all to reduce the monthly payment, often radically so. As for the portion of the loan balance that is beyond the value of the vehicle, it is lumped in with the rest of your “general unsecured” debts, which are paid only to the extent that you can afford to pay them during the life of the Chapter 13 case, which is often not much. The end result is that “cramdown” can often save you a lot each month on the loan payments, AND thousands of dollars over the life of the loan.
Conclusion
Chapter 7 is appropriate as far as your vehicle loan is concerned if discharging your other debts will free up enough money for you so that you can afford to pay the vehicle loan. Chapter 13 is instead appropriate if you need more protection, and need to lower your monthly payments (assuming your loan qualifies for “cramdown”).