Car Loans In Chapter 13 Bankruptcy
When you file a Chapter 13 bankruptcy petition, you must also file a proposed Chapter 13 plan. Your Chapter 13 plan provides the court, the trustee, and your creditors the details about how you propose to reorganize your debts. If you have a car loan, this debt will be included in your plan. The trustee uses a portion of your monthly plan payment to repay your car loan over the term of your plan. Because the term of most bankruptcy plans is 60 months, your monthly car payment through the plan may be lower than your payment prior to filing bankruptcy. Furthermore, the interest rate you pay on the car loan is often lower through a Chapter 13 plan than you are paying now. The lender for your car loan must release the lien on your car when the loan is paid in full. This may or may not take the full 60 months; therefore, the lien on your car could possibly be released before your bankruptcy case is closed.
Cramming Down Car Loans in a Chapter 13 Case
Valuing a car loan in a Chapter 13 plan is also referred to as “cramming down” the loan. If the value of your car is less than the amount owed on your car loan, your attorney can include a motion in the Chapter 13 plan to “cram down” the lien on your car to an amount equal to the market value of your car. For example, let’s assume that your car has a current market value of $7,000 and the payoff on your car loan is $11,000. The motion asks the court to reduce the secured lien on your car to the market value of $7,000. Most car lenders do not object to these motions; therefore, when your plan is confirmed, the secured lien amount will be $7,000 rather than $11,000. Once the lender receives $7,000 plus interest from the trustee, the lien on your car is paid in full.
What Happens to the Remaining Balance of the Car Loan?
The remaining $4,000 owed on the car loan will be treated as an unsecured debt. The lender will receive the same percentage as your other unsecured creditors (i.e. credit cards, medical bills, etc.). If your unsecured creditors are receiving a 10% payment, the lender for your car loan will receive $400 of the $4,000. When you complete your Chapter 13 plan and you receive your discharge, the lender cannot try to collect the remaining $3,600 from you. That debt is eliminated and you are under no legal obligation to pay any more money to the lender.
If you are struggling to pay your car loan and your other debts, contact an experienced chapter 13 bankruptcy attorney to discuss how filing a Chapter 13 bankruptcy can help you. Bankruptcy is designed to help individuals who are experiencing financial problems regardless of why they cannot afford to pay their debts. Whether your inability to repay your debts stems from unemployment, the loss of a spouse, unwise money management, or prolonged illness, we are here to help you find an affordable solution that gives you a fresh start