Chapter 13 Bankruptcy and Your Car

Chapter 13 bankruptcy has several tools to help persons who are struggling or unable to make payments on their car loans. For many Americans, a house and a car are two of the most valuable possessions they will ever own. A recent article from Bloomberg news reports that lenders today are allowing buyers to borrow more money relative to the cost of their car than several years ago, even for those with poor credit. However, having a large auto loan or a loan with a high interest rate can pose problems for some. If you are behind on your payments or have a car loan with negative equity, known as an “upside-down” or “underwater” loan, Chapter 13 Bankruptcy may be able to help you.

Cramdowns and Cars.

Lien stripping, also known as “cramming down” a lien, is a tool to help Chapter 13 Bankruptcy filers to get rid of some debt they owe on an asset, such as a house or a car. A recent post on this blog discussed cramdowns and real estate and showed how Chapter 13 bankruptcy can help homeowners who are upside-down on their mortgage by stripping away a second, or even a third, mortgage. Cramdowns under Chapter 13 Bankruptcy can also help reduce the debt owed on a car.

In 2005, the Bankruptcy Code was amended to limit the use of cramdowns with auto loans. Today, a person who files Chapter 13 bankruptcy can only cram down an auto loan on a car purchased more than 910 days before the filing. Because cars depreciate by several thousand dollars when they are driven from the dealer’s lot and then continue to depreciate rapidly over the first period of the auto loan, the 910-day rule may stop some Chapter 13 Bankruptcy filers from cramming down the loan when it is most helpful to them. However, even after the 910 day period, it is still possible for some debtors to be upside down on an auto loan. For these debtors, lien stripping is still a powerful tool to help make a crippling auto loan more manageable.

Chapter 13 Reasonableness Standard.

The Chapter 13 reasonableness standard may prevent some filers from keeping their cars, particularly if the car is a luxury model or if the Bankruptcy Court views the auto payment as an unnecessary expense. Chapter 13 bankruptcy requires the debtor to use all of their disposable income to pay their unsecured debts. This is sometimes referred to as the “best effort” requirement. To determine disposable income, a Chapter 13 filer fills out Form 22C, which asks them for details about their income and the amount that they are required to pay their secured creditors, including the company which holds their auto loan. A judge may decide that a large monthly payment on a luxury car is an unnecessary expense, whereas a lower priced car may be viewed by the judge as reasonably necessary.

Automatic Stay

Another protection that Chapter 13 Bankruptcy can offer is the automatic stay. An earlier blog post discussed how automatic stays can help stave off imminent home foreclosures. Automatic stays can also help keep a car from being repossessed, if you are behind on your car payments. When a debtor files for bankruptcy (either Chapter 7 or Chapter 13), the automatic stay is self-executing and immediately goes into effect under section 362 of the Bankruptcy Code.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code