Chapter 13 bankruptcy offers benefits that can help you keep your vehicle. If you're behind on your car loan payments, you can catch up through your Chapter 13 plan. Even better, if you owe more on your car loan than the car is worth, you might be able to reduce the amount owed.
But sometimes, keeping a vehicle in Chapter 13 bankruptcy isn't feasible. For instance, it might not be possible to keep your car if:
We also explain when you can use Chapter 13 to recover a repossessed car and what you'll do if you need to finance another vehicle during Chapter 13 bankruptcy. If you're considering filing Chapter 7, you'll want to learn about keeping a car in Chapter 7.
Chapter 13 bankruptcy offers several benefits to help you keep or get out from under your property. Here are a few that apply to vehicles.
Generally, you can keep your property in Chapter 13 bankruptcy, but not always. You'll have to show you can afford to pay the amount your creditors are entitled to receive in a repayment plan, which can get expensive.
Specifically, in addition to paying monthly living expenses, including your house and car payment, you'll need to pay the greater of the following through a three- to five-year repayment plan toward your unsecured debts, such as credit card balances, unpaid utility payments, and medical bills:
A creditor who doesn't think they're receiving the amount owed will object to your plan. Here are three things that you'll have to prove.
You're allowed to keep, or "exempt," a certain amount of property in bankruptcy. You must pay the value of any nonexempt property that you own. Because your plan must pay your unsecured creditors an amount equal to your nonexempt property, having lots of nonexempt equity in your car or other property could bump up your plan payment.
Example. Suppose your state exemptions allow you to keep $5,000 worth of vehicle equity. If you have $15,000 of vehicle equity, you'll have to pay $10,000 to your unsecured creditors through your bankruptcy plan. Of course, you must also consider any other nonexempt property equity, and if you have a significant amount, you might not be able to afford the required Chapter 13 plan payment. If your disposable income exceeds the nonexempt equity amount, you'll pay the disposable income amount.
Learn more about the Chapter 13 repayment plan.
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 can deduct only expenses reasonably necessary for your and your dependents' support.
Because your creditors want as much as possible, they'll object if it appears that you're unreasonably using funds. For instance, a creditor might object, claiming you're making an excessively high car payment or paying for a second car you don't need instead of paying the funds to creditors as part of your disposable income.
It isn't uncommon for a court to decide that a substantial luxury car payment isn't reasonable or that you need only one car to go to work. In both cases, you might not be allowed to use the car payment when computing your disposable income.
Instead, you'd only be able to claim an expense consistent with one lower-priced car. Learn when you can keep two vehicles in Chapter 13 bankruptcy.
If you have a financed vehicle, you must also prove that you can afford to pay the monthly payment, plus any "arrearages" or overdue amounts through your plan. This requirement is in addition to any other things you must pay in Chapter 13 bankruptcy.
Learn more about auto loans in bankruptcy.
It will be yours if you pay off your car during your Chapter 13 plan. You'll own it free and clear.
It's not unusual to pay off your car in Chapter 13, and it's likely to happen if the remaining time on your car loan is less than five years. One of the benefits of filing for Chapter 13 bankruptcy is that you come out of it financially free.
Most people owe nothing other than long-term debt, like a mortgage payment or school loan. After completing your payments, everything else gets fully paid or wiped out with the bankruptcy discharge.
Possibly. Suppose your car is necessary to your household because you need it to get to work. If you can afford to make the current monthly payment and catch up on the back payments through your Chapter 13 plan, you might be able to keep it. Ask your bankruptcy lawyer about filing a "motion for turnover."
A motion for turnover orders the lender to return your car. However, your lender might return your vehicle without requiring a turnover motion if your bankruptcy plan pays the lender. A local bankruptcy attorney can explain what to expect in your area.
Yes, it's possible to finance a vehicle while paying into a Chapter 13 plan. However, you'll need permission from the bankruptcy court. Your bankruptcy lawyer can explain the process and evaluate the likelihood of the judge approving a motion to incur additional indebtedness.
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