Your Vehicle in Chapter 7 and Chapter 13

Bankruptcy can protect your car or truck. Both Chapter 7 and 13 can, but which do you need?

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Especially in the winter, you need a reliable vehicle. Here are 5 questions to ask to find out which bankruptcy option is better for you and your vehicle.

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1.  Is your vehicle protected by the applicable exemption?

The first thing to find out if whether there is any risk that a bankruptcy trustee could take your car or truck from you if you filed a Chapter 7 case. Most of the time, your vehicle would be protected, or “exempt.” But the exemption that would apply changes depending where you live (and sometime on how long you’ve lived there). If your vehicle is exempt, then you can file a Chapter 7 case and not worry about the trustee.

But if your vehicle is worth too much so that its full value is not covered by the applicable exemption, you have three possible options:

1) File a Chapter 13 case to protect the vehicle. This way you pay enough to your creditors through a court-approved plan so that your creditors receive over time what they would have received had a Chapter 7 trustee taken and sold your vehicle.

2) File a Chapter 7 case and pay the trustee—usually through a short series of monthly payments—for the right to keep the vehicle. This prevents the trustee from selling your vehicle by paying him or her about as much as would have gone to the creditors had the vehicle been sold.

3) Surrender the vehicle in a Chapter 7 case—assuming you don’t absolutely need it—and allow the proceeds to go to your creditors, an especially sensible option if the debt to be paid first is one you need to be paid anyway, such as income tax or back child support.

2.  Are you current or almost current on your vehicle payments but really struggling to keep current?

Either Chapter 7 or 13 can enable you to keep up your vehicle payments by reducing or eliminating your other debts. Bankruptcy is a reprioritization. It empowers you to focus on what’s most important in your financial life. That often is your vehicle, which gets you to work and enables you to take care of your other personal and family responsibilities. Bankruptcy allows you to be wisely proactive, protecting your ability to pay your car payments—and for its necessary maintenance and repairs—before it’s too late.

3.  Are you current on your vehicle payments, or if not would you be able to get current within a month or two after filing a Chapter 7 bankruptcy?

If you are not behind on your payments, you will likely be allowed to continue making those payments after filing bankruptcy, regardless whether your other circumstances point you towards Chapter 7or Chapter 13.

And if you are not current but can catch up very quickly after filing bankruptcy, you can likely file a Chapter 7 case and keep your vehicle. However, if you couldn’t catch up that quickly, you will likely need the extra power of Chapter 13 to buy more time with your creditor.

4.  Is your vehicle worth less than what you owe on it, AND did you buy your vehicle at least two and a half years ago?  

If you say yes to both of these questions, you would likely be able to do a “cram down” on your vehicle loan in a Chapter 13 case. This means that through your court-approved plan you would in effect be able to reduce the balance of your vehicle loan down to the value of your vehicle, often also reducing the interest rate and extending the payments over a longer period, usually resulting in a greatly reduced monthly payment. Besides a lower monthly payment, a cram down could save you many thousands of dollars over the life of the loan. And it would leave you with a free and clear vehicle at the end of your Chapter 13 case. So if you qualify for a vehicle cram down that may be a good reason to file under Chapter 13, because it is not available under Chapter 7.

5.  Are your payments so high that surrendering the vehicle to your creditor—or maybe one of your vehicles if you have more than one—is your best choice?

Although bankruptcy can help you keep your vehicle in many ways, it also gives you the opportunity to get out of a bad deal, or one that no longer fits your present circumstances. Usually when you surrender your vehicle to the creditor you are left owing money—the “deficiency balance”—the difference between what you owe and what your creditor sells your vehicle at an auto auction, AFTER adding its additional costs of going through the repossession/sale process. This deficiency balance is often much higher than you expect. Bankruptcy gives you the opportunity to get rid of that debt. Chapter 7 would usually be the quickest way to do that specific task, unless your other financial circumstances pointed you towards filing Chapter 13. 

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