I heard that you can keep your vehicle in Chapter 13 and pay less than your vehicle’s outstanding loan balance. Is this true?
Get Caught Up on Car Payments
In all situations filing a Chapter 13 bankruptcy petition will allow you to keep your vehicle. Even if you are behind on your vehicle payments by several months or more, a Chapter 13 plan will let you make up these payments over the life of your plan.
For example, if your vehicle payment is $300 and you are behind by 5 months , you will be behind a total of $1500. Chapter 13 allows you to pay this $1500 over the life of the plan. If you have a 5 year plan this would work out to a payment of only $25/month. This is a small price to pay each month to ensure that your vehicle will not be repossessed by your creditors.
Reduce Car Payments Through Chapter 13 Bankruptcy
Furthermore, in some situations Chapter 13 actually lets you REDUCE the amount of money you must pay for your vehicle. The general rule is that if you bought a vehicle in the last 910 days (2 ½ years) for PERSONAL use, you MUST pay the full amount of the loan value. For example, suppose you purchased a vehicle 1 year ago. Currently you owe $15,000 on the vehicle but it is only worth $12,000. According to the rules under Chapter 13 you must continue to make your monthly payment based on the $15,000 amount. So what happens if you have purchased a vehicle more than 910 days ago OR the vehicle is not being used for PERSONAL use, but rather, being used for BUSINESS purpose? The law allows you to “Strip Down” the amount of your vehicle loan to the ACTUAL VALUE of the vehicle. In the above example this would mean you would be paying $12,000 instead of $15,000. A savings of $3000 for you.
The Same Rules Apply to Other Property
The same rules apply to personal property purchased within the last year (365) days. For example, say you purchase your washing machine on credit. If you bought the washing machine 6 months ago, you must pay the full price of the washing machine over the course of the Chapter 13 plan. However, if you bought it 2 years ago, you only have to pay the actual sale value of the washing machine. In almost all cases, this results in savings to you.
What Happens if a Vehicle is Surrendered?
But what happens if you decide to surrender (give up) your vehicle. Here the law says that if you elect to surrender your vehicle to your creditor, you are still liable for the FULL amount of the claim if your creditor is entitled to the difference under your vehicle contract and state law allows them to do so. (Whether or not this applies to you will depend on your unique situation, contact an attorney for more details).
Pay Less by Stripping Down
Overall, Chapter 13 can allow you to pay less for you vehicle through the process of “strip down” if you meet certain criteria. Given the complexity of this area of law it is important to consult an attorney who can tell you exactly how your vehicle will be treated in a Chapter 13 bankruptcy plan.