When you file for Chapter 13 bankruptcy, it’s common to wonder if your car is safe from repossession. Or if you recently lost it to repossession, whether Chapter 13 bankruptcy can help you get it back. Read on for the answers.
(For more information about what happens to your car and car loan in Chapter 13 bankruptcy, see Your Car in Chapter 13 Bankruptcy.)
When you file for Chapter 13 bankruptcy, the court puts an order called the “automatic stay” in place that prohibits attempts to collect a debt. The stay applies to most, but not all, creditors and debt types.
For instance, the stay will stop collections for credit card debt and other loans, as well as a foreclosure sale. It also extends to your car loan lender and prevents the lender from repossessing your car.
By contrast, the stay won’t stop criminal actions, child custody, or visitation proceedings, and, depending on your state law, certain eviction proceedings. (Learn more by reading How Bankruptcy Stops Your Creditors: The Automatic Stay.)
Here's how the automatic stay protects you in two different repossession situations.
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 Chapter 13 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).
Even so, you must make "adequate protection" payments from the time you file for bankruptcy until your plan is approved. These payments cover the depreciation of your car during this 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 the court confirms your plan.
When the Stay Might Not Protect You
The stay lifts by operation of law (which is another way to say “automatically”) and will go away if you:
- file a Chapter 13 bankruptcy shortly after the court dismisses a previously-filed Chapter 13 case (the stay will last for 30 days only unless you file and win a motion requesting additional time), and
- reject a personal property lease (for instance, for a car or equipment), the automatic stay will lift on the rejection date.
Also, a creditor can ask the court to “lift” or remove the automatic stay to continue collection proceedings during a bankruptcy case. A lender who can show that it stands to lose money—for instance, you stop making your car payments during your case—will have a good chance of winning such a motion.
In some cases, if the lender repossesses your car shortly before you file for Chapter 13 bankruptcy, you might be able to get the car back. In your repayment plan, you’ll need to provide for the payment of the arrearage and be 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. (To learn more, see My lender repossessed my car right before bankruptcy. Can I get it back?)
If you’re worried about your car getting repossessed, it’s likely that you can’t afford the payment. If you owe more than what the vehicle is worth, Chapter 13 bankruptcy can help.
You can reduce the loan balance on the car (or boat, storage building, furniture, jewelry, vacation home, and similar property) to the value of the property if the loan meets certain conditions (more below). You can also lower a high-interest rate to a more affordable amount. Any remaining amount gets treated as unsecured and will only get paid if you have room in your budget.
The ability to alter loan terms is called a cramdown, and it’s available for just about any type of loan secured by the property except for the mortgage on your principal home or a recently purchased item (more limitations below).
Example. Jean owes $10,000 on a Prius she bought three years ago, but it’s only worth $8,000. In Chapter 13 bankruptcy, a cramdown will allow Jean to reduce the amount she must pay for the car loan to $8,000.
The bankruptcy code also allows you to reduce a high-interest rate. The creditor is entitled to receive the prime interest rate plus 1 or 2 points. (Most courts accept the prime rate published by the Wall Street Journal.) For instance, if the current rate is 4%, most bankruptcy courts would approve a cramdown to around 6% (this will change as rates rise).
The cramdown option isn’t limitless. It doesn’t apply to new car loans (and other types of property), and it doesn’t survive a Chapter 13 case that is dismissed rather than discharged.