The Basics: Your Car or Truck

Bankruptcy can take care of your vehicle debt in many ways. Here are baker’s dozen—13—of them.

1. Protect your free and clear vehicle from being seized by your general creditors by filing bankruptcy and applying the applicable state or federal vehicle exemption.

2. If your vehicle is worth or has more equity than provided by the applicable exemption, protect that extra equity by paying off that extra amount in monthly payments to your Chapter 7 trustee. In some situations that money will just go to another one of your important debts that you would have to pay anyway, such as recent income taxes or child/spousal support arrearage.

3. In the same situation, you can also protect such extra value or equity through a Chapter 13 case. There as well the money paid to protect the vehicle may go to debts that must be paid anyway, or that money may have to be paid because of other requirements (based on your budget, for example). The end result may be that you protect your vehicle without really paying anything extra to do so.

4. If you can’t afford to make your vehicle loan payments and really need to keep your vehicle, eliminate all or most of your other debts so you can afford those payments. 

5. If you are behind on your vehicle loan, immediately stop your vehicle’s repossession by filing either a Chapter 7 or Chapter 13 case.

6. If you are not far behind on your loan and you would be able to catch up within a month or two (in addition to keeping current on the regular monthly payments) by eliminating all or most of your other debts, do so with a “straight bankruptcy” Chapter 7 case.

7. If you cannot catch up on your vehicle loan within a month or two even while not paying your other creditors, get as much as 5 years to catch up by filing an “adjustment of debts” Chapter 13 case, throughout that time being protected from repossession as long as you follow the court-approved plan.

8. Under Chapter 7 if you owe more on your vehicle than it’s worth, pay your vehicle lender the fair market value of the vehicle to “redeem” your vehicle at that price, and you will then own your vehicle free and clear without paying anything more.

9. If you cannot come up with the lump sum needed to “redeem,” you may qualify for a redemption loan. That’s a loan from a new lender in the amount of the value of the vehicle, which enables you to “redeem” when you have no way to come up with the money from other sources. Although the interest rate on a redemption loan is high, it can still be very worthwhile if your vehicle is worth much less than the amount you owe on it.

10. If your vehicle loan is more than 910 day old (about 2 and half years), do a “cramdown” on it, effectively re-writing the loan with very favorable terms: reducing the secured debt to the vehicle’s fair market value, usually reducing the interest rate, often significantly reducing the monthly payment, sometimes in part by stretching the term of payments out over a longer period, and often paying little or nothing on that portion of the loan beyond the vehicle’s value. A “cramdown” can save many thousands of dollars on a vehicle loan.

11. Prevent the seizure of your vehicle by the IRS or state tax agency for unpaid income taxes by either discharging (legally writing off) the taxes with a Chapter 7 case or paying them through a Chapter 13 case while you and your vehicle are under bankruptcy protection.

12. Prevent your state or local child/spousal support enforcement agency from seizing your vehicle and/or suspending your personal or commercial driver’s license through the special powers available only under Chapter 13.

13. If, notwithstanding all these favorable ways to keep your vehicle, you decide to surrender it to your lender, avoid owing a deficiency balance. That’s the often surprisingly large amount still owed after the lender sells your vehicle, often for not very much at an auto auction; adds a bunch of extra fees, credits your account whatever it got for your vehicle; and then often sues you for that balance. Either a Chapter 7 or 13 would almost always discharge this deficiency balance. 

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