Should I Keep My Car in Chapter 13 Bankruptcy?

You can probably keep your car in Chapter 13. But should you?

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Most people can keep their cars in Chapter 13 bankruptcy. But just because you can keep your car, doesn't mean you should. Here are some things to consider if you have a car and are filing for Chapter 13 bankruptcy.

(To learn how cars and car loans are treated in Chapter 13 bankruptcy, see Your Car in Chapter 13 Bankruptcy.)

You Are Upside Down on Your Car Loan

Sometimes it doesn't make sense to keep your car in Chapter 13 bankruptcy. If your car is worth less than your car loan,it may be better to "walk away" and let the lender repossess the car, especially if your car loan payments are high.

Cramdowns: Does It Change the Calculation?

If you qualify for a car loan cramdown, however, this picture might change. With a cramdown, you reduct the loan balance to the value of your car. So, for example, if your car loan is $15,000 but your car's replacement value is only $10,000, you could cram down the loan to $10,000. There are some restrictions on cramdowns, however. To learn more about how cramdowns work, see Car Loan Cramdowns in Bankruptcy.

However, even if you qualify for a cramdown, it still might make more sense to let the car go. This is especially true if you own an expensive car with high payments. You might be better off buying a cheaper (perhaps used) car so that your loan payments are more reasonable. If you've already filed for bankruptcy, you might need court approval before you incur a new car loan. The best practice is to consult with a local bankruptcy attorney before you proceed with the Chapter 13 bankruptcy.  

What Happens If You Let Your Car Go?

If you let the lender repossess your car, the lender will sell it, deduct the costs of repossession and sale from the sales proceeds, and then take the amount remaining on your loan. If there is anything left over (unlikely), you are entitled to any amount. Most often, the sale price minus repossession and selling costs is not enough to cover the amount of your loan. The difference between what you owe and what the lender was able to collect toward the loan is called the deficiency, which you now owe to the lender. In Chapter 13 bankruptcy, the deficiency becomes part of your unsecured debt. You will probably pay a small portion of your unsecured debt through your repayment plan, but the rest will be discharged at the end of the bankruptcy. (To learn more, see Unsecured Debt in Chapter 13: How Much Will You Pay?.)

If you plan to give up your car, consider selling it yourself or negotiating with the lender to reduce the deficiency. For example, if you voluntarily turn the car in ("surrender" it), the lender may waive some or all of the deficiency. To learn more about surrendering your car to the lender, see When You Can't Pay Your Debts FAQ.

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