Before moving forward, you should understand how bankruptcy may affect your car loan in chapter 13.
Perhaps the most critical, and immediate benefit of a bankruptcy filing, is the “automatic stay.” This provision of law prevents your vehicle lender from repossessing or taking any other collection action against you. If you succeed in confirming a Chapter 13 Plan, and then remain current on your Plan payments, the modification of the car loan should become permanent. Let’s look deeper.
3 Key Benefits – Your Car Loan in Chapter 13:
First and foremost, a car owner can typically retain their vehicle in a chapter 13 bankruptcy, so long as they can make the modified car payments. This is not necessarily true in a chapter 7 (read about your vehicle loans in chapter 7, here).
You have several very powerful tools to modify your car loan in chapter 13 Plan. The biggest potential benefits are:
- The interest rate on vehicle loans can often be reduced (as of the date of this article, 5% is common);
- The loan repayment period can be extended (up to 5 years);
- The amount owed, in certain circumstances, can be reduced to the fair market value of the car (check with us to see if you qualify).
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An Example – Modification of Your Car Loan in Chapter 13 :
BEFORE: Jane Doe purchased a vehicle three years ago. The fair market value of the car today is $10,000, but she still owes $16,000 (this is common – most people are upside down on their vehicle loans). She agreed to a pretty bad interest rate at the time: 14%. The remaining term on the loan is 3 years. These loan terms require Jane to pay $547/mo.
AFTER: In many instances, Jane Doe could reduce the debt owed on the vehicle by approximately $6,000 (the difference between the fair market value and the loan balance), while also adjusting the interest rate down from 14% to approximately 5% (as of the date of this article). Jane can also extend the loan term to 5 years. Instead of her current $547/mo. payment, Jane would only need to pay $189/mo. And in 5 years, the debt will be completely paid off.
Other Benefits of Chapter 13
If Jane Doe were also dealing with delinquent personal loans, credit card debt, payday loans, medical debt, a delinquent mortgage or unpaid taxes, she can deal with all these issues in her chapter 13 bankruptcy filing.
While each person’s facts and situation may differ, the above hypothetical is a realistic example of what may happen to your car loan in chapter 13. To assess your individual situation, we recommend consulting with a local bankruptcy attorney.
If you live in the Bay Area and would like a free initial consultation, give us a ring at (510) 227-5235, or submit your inquiry electronically: