Vehicle repossession is handled differently, depending upon whether you file for Chapter 7 or Chapter 13 bankruptcy. In both cases, an automatic stay is placed on all collection activities including your car lender’s attempts to collect payments. However, there are a few avenues available under Chapter 13 if you wish to keep your car and have the funds to do so, but are simply behind in your payments.
How to Avoid Repossession of Your Vehicle Through Chapter 13
Typically in Chapter 13 bankruptcy, you keep your possessions so long as you use your disposable income (what is left after you deduct your necessary living expenses like food and shelter from your total income) to repay your creditors over time. There are three common classes of claims: secured claims, unsecured priority claims, and general unsecured claims. Car loans are secured claims; this means the car is collateral for the loan and it can be repossessed if you fail to make your car payments.
There will be no repossession of your car under Chapter 13 if: (1) you file for Chapter 13 bankruptcy, (2) your debt repayment plan reasonably deals with the back payments for the car loan, and (3) you keep up to date with the payments.
All collection activities are stayed while you wait for your debt repayment plan to be approved. But if you wish to keep your car, you must also make reasonable payments designed to cover the car’s depreciation from the time you file for bankruptcy until the plan is approved. However, you can usually lower the required interest rate which must be paid outside your case while your Chapter 13 matter is pending. This might allow you to obtain a lower monthly payment, and also grant you the opportunity to pay off your vehicle a bit faster.
In other words, you may not have to bring your back payments up to date immediately under Chapter 13, but you do have to keep making what are called “adequate protection” payments while waiting for plan approval. If you have a lot of nonexempt equity on your car (most people don’t), this could increase your plan payments.
When a car is repossessed just before you file for bankruptcy, you may be able to get your car back under Chapter 13 if you are able to continue making monthly payments and your plan includes a provision to pay off the arrearage—the payments on which you defaulted.
What is a Cramdown?
When the amount of your car loan is greater than the value of the car, this is called an “upside down car loan.” A car depreciates rapidly once it is purchased, so this is not an uncommon situation. If you bought your car more than 910 days ago and the loan is upside down, you may be able to reduce the amount of the loan through a bankruptcy procedure called a “cramdown.”
To use the cramdown, you must propose that the car lender receive the value of the car, rather than the entire loan balance under certain conditions. The remainder of the loan becomes unsecured debt, treated in Chapter 13 like your other debts that are not secured by collateral. If you successfully complete your plan, your debts will be discharged and you will own your car without further threat of repossession.
As you can see, there are a few options for dealing with vehicle repossession, but they do require careful thought and planning. Knowledgeable Los Angeles bankruptcy attorney Devin Sawdayi may be able to help you put together an adequate plan so that you do not lose your car. Contact our office at 310-475-9399 or via the online form.
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