Chapter 13 bankruptcy can be a great way to save a car if your lender is threatening to repossess it. You can even reduce your balance on your car loan if your car is old enough. However, if you're in a Chapter 13 for other reasons and you no longer want your car, you can give it up in the case.
Secured Debts for Motor Vehicles in Chapter 13
Car loans are secured debts, which means that if you don't pay them, the lender can take the car and sell it to satisfy the debt. Bankruptcy law is specific about how you can treat secured debts for motor vehicles in a Chapter 13 case. You have four options in a Chapter 13 case when it comes to a car. You can either continue to pay for the car directly to the creditor outside of the case, pay the balance in full through the plan with a modified interest rate, propose a cramdown of the car's value or surrender the car. Your Chapter 13 plan must propose one of these three scenarios for every vehicle loan you have.
Payment Outside of the Case
If you want to keep your car in a Chapter 13 and you're current on the car payments and happy with your interest rate, you can propose to make your car payments directly to your lender outside of the plan. When you file your budget, your car payment will be included in your budget and your Chapter 13 plan payment will be accordingly smaller. The car lender must agree to be paid outside the plan; if the creditor shows that you're behind on your payments, you have to pay the car through the plan.
Payment in Full Through the Plan
If you bought your car within 910 days prior to the date you filed the bankruptcy and you're behind on your car payments or want a better interest rate, you can pay the car in full through the plan. You must pay the full balance due on the loan, but you can modify the interest rate. The lender will file a claim with the court showing the exact balance, and you must pay enough into your plan to pay the lender in full.
Cramdown Through the Plan
If you still have your original car loan that you used to buy your car and you bought your car more than 910 days before you filed your bankruptcy case, you can propose to cram down the lender's claim. That means that you must only pay the actual value of the vehicle through the plan with interest, and the remaining balance is paid a percentage and discharged, just like your unsecured debts. For example, if you financed a car in 2002 and you file bankruptcy in 2006, you can propose a cramdown. If your car is worth $2,000 but you still owe $5,000, you pay $2,000 plus interest, and the remaining $3,000 receives the same percentage that your credit cards receive; the rest is discharged. You must be able to prove the car's value, and you must be able to show that the purchase was more than 910 days before your bankruptcy filing date and that the loan you have is the same loan you used to buy the car.
Surrender
You can choose to surrender your car in a Chapter 13 case if you don't want it. The lender will repossess the car and sell it. Once the lender sells the vehicle, the lender can file a claim for the deficiency balance. The deficiency balance is the difference between what you owed on the car and the sale price at auction. The lender will have a general unsecured claim for the deficiency balance and will only receive the same percentage as other general unsecured creditors, such as credit card companies.
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