How Chapter 13 Actually Works When Behind on a Vehicle Loan

New carFalling behind on a vehicle loan is scary, especially if you are really relying on that vehicle to get to work—or to find work, and to take care of life’s other responsibilities. It is all too easy to get a vehicle repossessed — vehicle lenders’ contracts generally allow them to do as soon as you are at all late on your payment.

Limited Help Under Chapter 7 “Straight Bankruptcy”

Furthermore, if you have fallen behind on your payments even filing a Chapter 7 bankruptcy provides only limited help.

A Chapter 7 filing does immediately stop the lender from repossessing your vehicle through the “automatic stay,” which protects you and your assets from virtually all of your creditors’ actions against their collateral.

Then if you want to surrender the vehicle because you can’t make the payments, Chapter 7 will usually give you until about a month or so later and then—very importantly—it will discharge (legally write off) the “deficiency balance.” That’s the often shockingly high amount that you would owe after the lender sells the vehicle (usually at an auto auction for not much money) and credits those proceeds to your account balance, but also subtract its costs of the repo and the sale.

Or if instead you want to keep your vehicle and you are current on it, you can “reaffirm” the debt. This means you don’t discharge the debt on your vehicle, but rather “reaffirm” it. Then you continue making the payments, and hopefully eventually pay it off.

But if you want to keep the vehicle and are behind on your payments, the lender will most likely require you to catch up within a month or two after filing the Chapter 7 case. Or else you will usually not be allowed to keep the vehicle. In fact although the “automatic stay” protection is generally effective throughout the three to four months that a standard consumer Chapter 7 is open, that period could be shortened if the lender files a motion to lift the “automatic stay” and gets court permission to repossess.

So Chapter 7 is likely a good option if you are current on your vehicle loan or can get current within about two months or so after the bankruptcy filing.

Vehicle Loans in Arrears in Chapter 13

But if you need more time than that to catch up on your vehicle loan, then you likely need the addition power of Chapter 13. In most situations it allows you much, much more time to catch up—as much as three to five years.

Under Chapter 13 you and your attorney put together a formal detailed payment plan, saying how much you are going to pay per month, and where that money will go. If you entered into your vehicle loan relatively recently—within the last two and a half years—then your plan will earmark enough money during the life of the plan to catch up on the missed payments. That proposed plan goes through a court approval process, with the proposed payment terms able to be challenged by the creditors and the trustee based on whether it pays enough to the vehicle creditor. But once the plan is “confirmed” (approved) by the bankruptcy judge, the creditor has to live with it (as long as you comply with the plan by making the required payments and meeting its other terms).

You do not need to catch up on missed payments at all if you entered into your vehicle loan more than 2 and a half years before filing your Chapter 13 case. If so, you would not only not need to catch up on the loan, you would usually be able to pay a lower monthly payment, often at a lower interest rate, and—if the vehicle is worth less than the loan balance—pay less on the loan overall. In spite of paying less, you would own the vehicle free and clear at the end of the case.

If you live in the Dallas-Fort Worth area call me so we can meet to find out how Chapter 7 or 13 can help with your vehicle loan. My name is Carrie Weir, and I’m a Texas bankruptcy attorney serving the Metroplex, especially the area around Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, and Rowlett. Please get in touch with me for a free and confidential consultation so that you can make informed choices about your vehicle loan(s) and all of your finances. Call 972-772-3083 or use the contact form here. Thank you. I hope to have the opportunity to serving you.

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