Before moving forward, you should understand how bankruptcy may affect your car loan in chapter 13.
The Automatic Stay Halts Repossession
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.
Potential 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 through a confirmed chapter 13 Plan. The biggest potential benefits are:
- The interest rate on vehicle loans can often be reduced (usually a confirmable rate is around 5%);
- 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 (only available in certain situations).
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Hypothetical Example – Car Loan in Chapter 13:
The Current Situation: Jane Doe purchased a vehicle three years ago. The fair market value of the car today is $10,000, but she is still obligated on the loan for $16,000 (this is not uncommon because vehicles tend to depreciate faster than the owner can pay down the loan). She agreed to a pretty bad interest rate at the time: 14%. The remaining term on the debt is 3 years. These loan terms require Jane to pay $547/mo.
Situation In Chapter 13: 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 to approximately 5%. Jane can also extend the loan term to 5 years. Instead of her current $547/mo. payment, Jane would have reduced her payment obligation of $189/mo.
Other Benefits of Chapter 13
If Jane Doe were also dealing with delinquent personal loans, credit card debt, medical debt, a delinquent mortgage or unpaid taxes, she can simultaneously deal with all these issues within her chapter 13 bankruptcy filing.
While each person’s facts and situation may differ, the above hypothetical is a realistic example of what may be accomplished through a chapter 13. To assess your individual situation, we recommend consulting with a local bankruptcy attorney.