Chapter 13 bankruptcy can affect your car in a few different ways, but, in most cases, you don't lose your vehicle. In fact, Chapter 13 bankruptcy is designed for people who are trying to get a handle on their finances, and want to prove they're making an effort to pay off their debts. How this impacts your car, though, depends on many factors.
Chapter 13 Bankruptcy in a Nutshell
A Chapter 13 is often referred to as a repayment bankruptcy because you work with your trustee to set up a three- or five-year repayment plan which allows you to pay a reasonable amount of your debts. Secured debts, such as your mortgage or auto loan, typically take the highest priority for repayment.
Nonpriority unsecured debts, such as medical bills and credit card balances, may not be fully repaid over the course of the plan; some may get wiped away entirely. If you've kept up with your payment responsibilities throughout your bankruptcy, certain remaining unpaid, unsecured debts may be forgiven in the end – meaning you're no longer responsible for them. This could include car payments in some cases.
Repayments and Exemptions in Chapter 13
Even though you're responsible for making your agreed upon payments to your bankruptcy trustee in a Chapter 13, there's usually room for you to keep some of your property as long as it can be covered by an exemption.
Most states allow bankruptcy filers to exempt, or be non-liable for, the value of certain property. Exemption amounts vary from state to state, and can cover a range of things necessary to maintain your home and your job. This means you have a better chance to keep some of your property, like your vehicle.
Exemptions in a Chapter 13 bankruptcy typically include a primary residence, a modest car, and the materials necessary for a skilled trade or for education (if you're in school or have children who are). If you can cover the value of your vehicle entirely with an exemption, you should be allowed to keep the car. If not, you may have to come up with some additional cash in order to do so.
Do You Own Your Car?
If you own your vehicle outright, you should be able to keep it during a Chapter 13 bankruptcy, as long as it's worth less than your state allows for exemption. If your car is worth more than your state allows, you're required to pay your trustee the difference between what your state allows in exemption and the value of your vehicle.
For instance, if your car is worth $7,500 but your state only allows $5,000 for a vehicle exemption, you would have to come up with an additional $2,500 in order to keep it. The good news is that you don't have to come up with the cash all at once. The amount over the exemption is added to your repayment plan, and you have your whole bankruptcy to pay for it.
In some cases, you can use an additional state bankruptcy exemption, called a wildcard exemption, to cover the balance. If this isn't available, your trustee may sell your car.
If they do sell your vehicle, they give you the amount that would have been exempt, which you can use to purchase an affordable used car to get you through your bankruptcy. Any extra money from the sale of your vehicle is then applied to your repayment plan.
Auto Loans and Chapter 13 Bankruptcy
If you have an auto loan, keeping your car may depend on how much equity (value) is in it, and whether or not you're up to date on your auto loan payments. If you're behind, that arrearage can be added to your repayment plan in a Chapter 13 bankruptcy if you decide to keep your vehicle.
However, you also have to prove that you can continue to make your loan and bankruptcy repayment plan payments. If you're planning to keep the car, you're responsible for paying all interest charges and additional fees to your lender, as well.
If you have an auto loan but are upside down with negative equity, a Chapter 13 bankruptcy allows a unique opportunity to cram down your loan. In a cramdown, the balance of your car loan is reduced to the amount of equity that's in your vehicle.
For example, if you owe $12,000 on your auto loan, but your car is only worth 9K, this means you only have to repay the $9,000 to your lender.
Is Your Car Worth Keeping?
Now that you know it's possible to keep your vehicle during a Chapter 13 bankruptcy, you have to ask yourself if it's worth it. If you can't cover your car with a vehicle exemption, is it worth adding that cost to your repayment plan? You could save yourself thousands of dollars if you choose to surrender your car instead of keeping it.
When you surrender your vehicle to a lender, they typically sell it at auction. Anything left over after the lender deducts the cost of the sale is applied to your auto loan balance. If there’s money left over from the sale after your loan balance is paid – which rarely happens – it goes to you. If the proceeds from the sale don't cover your entire car loan balance, anything not covered by the vehicle sale is added to your unsecured debts with a potential to be wiped out in the end.
If you choose to surrender your car but still need another one, there are processes in place that allow you to purchase a vehicle with your trustee's permission during an open Chapter 13 bankruptcy. Since you may not have the disposable income to do this outright while going through a bankruptcy, you may even be allowed to take on a small auto loan for an affordable car.
Looking for a Place to Start?
Getting another vehicle during a Chapter 13 bankruptcy means finding a bankruptcy auto lender, and not all dealerships work with this kind of lender. In many cases, you need to find a special finance dealer that's signed up with subprime lenders when you're in this situation.
Here at The Car Connection, we know how difficult it can be to find the right kind of lender. That's why we want to guide you toward a dealership that has the lending resources you need. Don't stress over the hassle of finding a bankruptcy car loan on your own – let us get you started!
Simply fill out our fast, free, and zero-obligation auto loan request form, and we'll get to work connecting you with a local dealer!