If you're considering filing for Chapter 13 bankruptcy, you probably want to know what will happen to your car or truck. Does Chapter 13 bankruptcy let you keep your a car? Will the car be repossessed if you're behind on your loan or lease payments? And what happens if the car is worth less than the amount of the car loan? This article discusses when you can keep your car in Chapter 13 bankruptcy, whether you can reduce the amount of your car loan, how Chapter 13 bankruptcy affects repossessions, and more. (For information on your car in Chapter 7 bankruptcy, see Nolo's article 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 Nolo's article An Overview of Chapter 13 Bankruptcy.)

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." The automatic stay also prevents your car loan lender from repossessing your car. Here's how the automatic stay protects you in two different situations: When the lender has not repossessed your car before you file for bankruptcy, and when the lender has already repossessed your car when you file for bankruptcy.

No repossession when you file for bankruptcy. If the lender has not repossessed your car and you file for bankruptcy, the automatic stay prevents the lender from repossessing your car until the bankruptcy judge approves your repayment plan. Then, if your repayment plan deals with the back payments (the arrearage) on your car loan, the lender cannot repossess your car during and after the bankruptcy (assuming you stay current on your payments).

Although the lender cannot repossess the car due to having back payments, you must make "adequate protection" payments from the time you file for bankruptcy until your plan is approved. These payments are designed to cover the depreciation of your car during this time period. Usually, adequate protection payments are equal to the amount of your car payment. So, once you file for bankruptcy, keep on making your car payments until your plan is confirmed.

Your car is repossessed before you file for bankruptcy. In some cases, if your car is repossessed shortly before you file for bankruptcy, you may be able to get the car back if payment of the arrearage is provided for in your repayment plan and you are able to continue making your monthly payments. If your car has been repossessed and you plan to file for Chapter 13 bankruptcy, contact an attorney immediately.

Your Car Expenses Must Be Reasonable

First, let's look briefly at how a repayment plan works. 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. So, for example, you cannot deduct the cost of going to a fancy spa each month. 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.

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