Cars Under Chapter 13 Bankruptcy Law

Filing for bankruptcy under Chapter 13 can give a debtor an opportunity to pay back missed payments on their car loan. They also might be able to reduce their debt on the loan. Chapter 13 does not always allow a debtor to keep their vehicle, though. People who have substantial equity in their car might find that it falls outside any exemptions under federal or state bankruptcy laws. In other cases, a debtor might not be able to keep a second vehicle on which they have a loan if it is not essential. Also, if the loan payments are very high, they might not be able to keep the car.

If you qualify for both Chapter 13 and Chapter 7, you may want to consider how filing under Chapter 7 can affect your car.

Benefits of Filing Under Chapter 13

The automatic stay will stop any efforts by the lender to repossess your car. You may be able to get your car back if you file for bankruptcy soon after the lender repossessed your car. Meanwhile, you can integrate the back payments owed on your car loan into your Chapter 13 repayment plan while making current payments. This will prevent repossession permanently if you can keep up with both sets of payments. On the other hand, if you feel that you would prefer to give up the car, you can surrender it and avoid making further payments.

Cars tend to lose value quickly, which may mean that the amount of a car loan ends up being greater than the value of the car. Chapter 13 allows a debtor to reduce the amount owed on a loan to the value of the asset attached to the loan, while turning the remainder into non-priority unsecured debt. You may not need to pay back non-priority unsecured debt in your payment plan, or you may need to pay back only part of it. To trigger this feature, however, you need to have owned the car for more than two and a half years before filing under Chapter 13.

Defeating Creditor Objections to Keeping Your Car

Sometimes a creditor of a debtor who files under Chapter 13 will be concerned that they are not receiving the full amount that they are due because the debtor is retaining significant assets. If your car loan creditor objects to your repayment plan, you will need to prove that your car-related expenses are reasonable and that you will be able to cover any extra equity in your vehicle. Proving that the expenses are reasonable means that they are necessary to support your family and you. Paying for a second car or for a very expensive car may not be reasonable, since you may not need this car to go to work or handle family errands.

In other situations, you may need to make a substantial payment based on the equity in your vehicle if the relevant bankruptcy exemption covers only a small amount of the vehicle equity. Sometimes debtors cannot keep up with payments if they also have substantial equity in other non-exempt property.

Last reviewed October 2024