Your Car in Chapter 13 Bankruptcy: An Overview

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 it’s not feasible to keep a vehicle in Chapter 13 bankruptcy (and you might not want to). For instance, it might not be possible to keep it if:

• you have a lot of nonexempt car equity (equity you can’t protect with a bankruptcy exemption)
• your car payment is exceptionally high, or
• you’re making payments on a second vehicle that you don’t need.

Read on to get the details. (If you’re considering Chapter 7, see Chapter 7 Bankruptcy and Your Car.)

How Chapter 13 Can Help With a Vehicle

Chapter 13 bankruptcy offers several benefits that can help you keep—or get out from under—your property. Here are a few that apply to vehicles.

• You can stop a repossession. When you file for Chapter 13 bankruptcy, most creditors must stop any collection efforts against you as the result of an order called the "automatic stay." If you’ve already filed for Chapter 13 bankruptcy, a car lender can’t repossess your car. In some cases, you can even get a car back if the lender repossessed it shortly before you filed for Chapter 13. (To learn more, see Car Repossessions and Chapter 13 Bankruptcy.)
• You can give a car back to the bank. If you have a car payment that you can’t afford, or you’re making payments on a car that’s unreliable or needs costly repairs, it might make sense to let it go. In Chapter 13, you can get out from under the payment by surrendering the vehicle.
• You can catch up on your car payment. If you’re 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’re 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.
• You might be able to reduce your car loan. If the amount of your car loan is more 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 (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 (your disposable income goes to pay this type of debt—more below). The one catch is that you must have bought the car more than two and a half years before filing for bankruptcy. (To learn more, see Car Loan Cramdowns in Bankruptcy.)

Keeping a Vehicle in Chapter 13—What You’ll Need to Do

Generally, in a Chapter 13 bankruptcy, you can keep your property—but not always. You’ll have to show that you can afford to pay the amount your creditors are entitled to receive in a repayment plan, and it can get expensive. Especially if you plan to keep a lot of property that isn’t protected in bankruptcy.

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):

• your monthly disposable income (the amount remaining after you pay allowed bills), or
• the value of all nonexempt property you plan to keep that you can’t protect with a bankruptcy exemption.

A creditor who doesn’t think that they’re receiving the amount owed will object to your plan. Here are two things that you’ll have to prove.

You’re Paying for any Excessive Motor Vehicle Equity

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 keep. 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.

For instance, suppose that 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 for $10,000 of it through your bankruptcy plan. Of course, you must also take into account 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.

(To learn more, see The Chapter 13 Repayment Plan.)

You Can Prove That Your Car Expenses Are 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 dependents.

Because your creditors want to be paid as much as possible, they’ll object if it appears that you’re using funds in an unreasonable manner—for instance, to make an excessively high car payment or to pay 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 an exceptionally large car payment on an expensive luxury car isn’t a reasonable expense, or that you only need one car to go to work. In both cases, you might not be allowed to use the car payment objected to when computing your disposable income. Instead, you’d only be able to claim an expense that would be consistent with one lower priced car.

(Learn more by reading Can I Keep Two Cars in Chapter 13 Bankruptcy?)