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