We all need our vehicle. It gets us to and from work, it gets us to the grocery store, and many other places. But what happens if you file for bankruptcy? You might worry about keeping that vehicle, especially if it’s the source of your money problems. A Rainwater, Holt & Sexton bankruptcy attorney is ready to help explain the process to you.
Chapter 13 Options
The 910-Day Rule
If you have purchased a vehicle at least 910 days (about 2.5 years) from the date of the filing of a Chapter 13 bankruptcy, you are eligible to “cram down” the balance on your vehicle loan.
Cram Down of Your Vehicle Loan in a Chapter 13 Bankruptcy
A “cram down” of an auto loan is a major benefit available in Chapter 13. If you owe more on your vehicle than it is worth, or you are paying an exorbitant interest rate, cramming down a car loan in Chapter 13 bankruptcy can reduce your balance and lower your interest rate, thereby reducing your payment.
Making the Cram Down Stick
In order to make the “cram down” of the balance or the interest rate permanent, you must complete your Chapter 13 plan. The original balance and interest rate may be reinstated if you do not complete your Chapter 13 plan.
Extending Your Vehicle Loan
An additional advantage in a Chapter 13 bankruptcy is that you can extend your payments over the course of a 36 to 60 month plan, regardless of whether you meet the 910-Day Rule. For example, you have 42 months left on your auto loan, by proposing a 60-month Chapter 13 plan, you can extend your loan 18 more months, thereby significantly reducing the vehicle payment.
If you are behind on your vehicle loan, Chapter 13 can also help you catch up on your payments by paying the loan over the life of the Chapter 13 plan.
Chapter 7 Options
Reaffirming the Vehicle Loan In Chapter 7
A reaffirmation agreement is a contract with a creditor whereby a you agree to pay for a debt as if the bankruptcy does not apply. In a Chapter 7, vehicle creditors often encourage you to sign a reaffirmation agreement. In many cases, reaffirmation agreements are not in your best interest, as you are once again liable on the loan, subject to a deficiency judgment and potential negative credit reporting.
In many instances, it is best not to agree to a reaffirmation but continue to make the payments and keep the vehicle. Most creditors will allow you to keep a vehicle, as long as the payments are made and current. If no reaffirmation agreement is executed, you have the ability to walk away from the vehicle without any danger of a deficiency judgment, should you have any issues paying the vehicle loan in the future.