Your Car in Chapter 13 Bankruptcy: An Overview
Keeping your car, reducing your car loan, avoiding repossession, and more.
What happens to your car, truck, van, motorcycyle, or other vehicle if you file for Chapter 13 bankruptcy? Usually, you keep your cars and vehicles in Chapter 13, but that might not be possible if you have lots of nonexempt equity in your car or your car payment is exceptionally high. If you are behind on your car loan payments, you can catch up on arrears through your Chapter 13 plan. Even better, if you are upside down on your car loan, you may be able to reduce the amount owed in certain situations. Read on to get the details.
(If you are considering Chapter 7, see the articles in Your Car in Chapter 7 Bankruptcy.)
Keeping Your Car in Chapter 13 Bankruptcy
Generally, in a Chapter 13 bankruptcy, you keep your property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years -- through a repayment plan that's approved by the court. (To learn more about how Chapter 13 bankruptcy works, see our Chapter 13 Bankrutpcy area.)
Although as a rule, you generally can keep property in Chapter 13, whether that is possible in your situation depends on the equity in your car and how reasonable your car payment is.
Motor Vehicle Equity Can Affect Your Plan Payment
Because your plan must pay your unsecured creditors an amount equal to your nonexempt property, if you have lots of nonexempt equity in your car, this could bump up your plan payment. (To learn more, see The Chapter 13 Repayment Plan.) However, because of the nature of car loans and depreciation, most people don't have lot of excess equity in their cars.
Your Car Expenses Must Be Reasonable
In a Chapter 13 bankruptcy, your repayment plan must show that all of your disposable income -- that's your income minus your necessary living expenses -- is used to repay your unsecured debts under your repayment plan. In determining your disposable income, you may deduct only those expenses that are reasonably necessary for the support of you and your dependants.
This "reasonableness" provision might come into play if you own a luxury car. A court may decide that an exceptionally large car payment on an expensive luxury car is not a reasonable expense, and you might not be allowed to use that large car payment when computing your disposable income. Instead, you may only be able to claim an expense that would be consistent with a lower priced car.
Catching Up on Car Loan Arrears
If you are behind on your car loan or lease and you file for Chapter 13 bankruptcy, you can keep your car if you pay the arrearage (the amount you are behind) through your repayment plan and continue to make your regular car payments. As long as you stay current on your car loan and your repayment plan, the lender cannot repossess your car.
The Automatic Stay and Car Repossessions
When you file for Chapter 13 bankruptcy, most creditors are instantly prohibited from continuing collection efforts against you. This is called the "automatic stay." If you have already filed for Chapter 13 bankruptcy, the lender cannot repossess your car. If the lender repossess your car before you file for Chapter 13, however, you still may be able to get it back. To learn more, see Car Repossessions and Chapter 13 Bankruptcy.
Reducing Your Car Loan in Chapter 13 Bankruptcy
If the amount of your car loan is greater than the value of your car (not an uncommon occurrence, because cars depreciate so quickly), you might be able to reduce the amount of your loan in Chapter 13 bankruptcy . This is called a cramdown. Essentially, you can reduce the amount you owe to equal the value of the car. Whatever is left becomes unsecured debt, and is treated like your other unsecured debts. The one catch -- you must have bought the car more than two and a half years ago.
To learn more, see Car Loan Cramdowns in Bankruptcy.