Chapter 13 bankruptcy can help you avoid the repo man. That being said, bankruptcy should never be entered into lightly. If avoiding repossession is your sole reason for filing, you might want to rethink your plan, because filing is only the first step in the long road of a Chapter 13 bankruptcy.
The Automatic Stay
Repossession is halted when you file for bankruptcy because an "automatic stay" goes into effect that prevents creditors from pursuing any further action for the time being. The automatic stay can be limited, and, depending on your situation, not all types of debt are covered by the stay.
If a debt is unsecured and can be wiped out during bankruptcy, such as credit card debt, an automatic stay stops the collection effort for good. Once the bankruptcy is discharged, there isn't any debt left to collect. The automatic stay only prevents collection on secured debts during the bankruptcy, such as mortgages and car loans.
Paying for Your Car During a Chapter 13 Bankruptcy
If you're keeping your vehicle during a Chapter 13 bankruptcy, you have to be able to make your car payments. On top of that, you also have to make up past due payments and any other fees you have been charged. The good news is that you're able to spread these payments out over the course of your bankruptcy.
In a Chapter 13, your debts get repaid through a repayment plan over either three or five years. The automatic stay you're granted protects you from repossession or loss of property until your payment plan begins.
In most cases, you're required by the court to make payments on an auto loan which are known as adequate protection payments. These payments are meant to cover the cost of depreciation, from the time you file until repayment begins. So, even though the lender is prohibited from repossessing your vehicle temporarily, this protection is lifted if you miss any of your payments.
Cramdowns in Chapter 13 Bankruptcy
In the event that your car is worth less than you owe on the loan (negative equity), you may be able to use what's known as a "cramdown." In a Chapter 13 bankruptcy, a cramdown reduces the loan balance to the current value of your vehicle. This can come in handy if you purchased a car that depreciated quickly, or if you have a high-interest auto loan.
When you only repay the lender the replacement value of your vehicle, the unpaid portion of your loan gets wiped out along with all other unpaid unsecured debts when your bankruptcy is discharged. One catch to the cramdown, however, is that you have to have had your car for at least 910 days in order for it to be eligible for this treatment.
Getting a Car During a Chapter 13
If you weren't able to stop your vehicle from being repossessed during your Chapter 13 bankruptcy and need another one, there are certain rules in place that make this possible. Make sure you talk to your trustee and get the appropriate permission before proceeding, however.
Once you do get permission, you're able to go to a dealership that can handle bankruptcy auto financing and get a sample purchase order. Make sure the paperwork is marked with the exact make and model and states "or similar" next to your choice because you have to take this to the court for approval.
It can take the court time to decide if you're able to handle this additional debt in your repayment plan. If the car you picked out has been sold before you're approved, and your paperwork didn't include "or similar," you could be stuck repeating the entire process.
Finding Bankruptcy Auto Financing
If you need to find an auto loan during or after your Chapter 13 bankruptcy, but aren't sure where to turn due to your credit situation, The Car Connection is your answer. We work with one of the nation's largest special finance dealer networks, and we want to help you get connected to a dealership in your area.
These dealers have the lenders available to work with people in many challenging credit situations including bad credit, no credit, and bankruptcy. There's no obligation or cost. All you have to do to get started is fill out our easy car loan request form, and we'll get to work finding a local dealership to connect you with.