Auto Loans in Chapter 13
November 3, 2022
If you are wondering how automobile loans are handled when you file a Chapter 13 bankruptcy, here are the main points to consider including what to do if the car has been repossessed.
HOW TO PAY FOR A CAR IN CHAPTER 13
Generally folks considering filing Chapter 13 are concerned about how their auto loans will be treated. It is reasonable as most people need their cars for driving to work and generally getting around.
THERE ARE 3 OPTIONS AVAILABLE FOR YOU
(1) Paying the car debt though the Chapt
(2) Paying the car loan directly and not through the plan; or
(3) Surrendering the vehicle.
Paragraph 4 discusses repossessions
(1) PAYING THE CAR LOAN THROUGH THE CHAPTER 13 PLAN.
When the car loan is paid through the plan, you can change some or all of the loan terms and still keep the vehicle. You also do not have to catch up missed payments on the loan because you are starting fresh. How much you have to pay depends on a number of factors.
- Valuation – Most cases – When paying the car through the plan the payoff balance as of when you file the case must be paid if the loan was used to buy the car for the debtor’s personal use less than 910 days (roughly 2 ½ years) before filing the case. This covers the vast majority of car loans. One of the great advantages of paying the car debt through Chapter 13 is that the interest rate on the balance is market rates and not the contract rate. The Supreme Court said in Till v. SCS Credit Corp. that the prime rate plus 1 to 3% is all that’s required. Currently we see interest rates in the neighborhood of 5 to 6% which is substantially less than the 15%, 20% and 25% rates seen on many contracts.
- Valuation – Exceptions – If any of the following describes the car loan, then the amount to be repaid can be the lesser of the current loan balance or the retail value of the car. This means if your car is worth less than what is owed, you can save thousands of dollars paying the lesser or “crammed down” value. The most common exception is if the car was acquired more than 910 days ago. Other exceptions are if acquired for other than personal use such as for carrying on a business or for a family member; if the loan covers more collateral than just the car; or if the loan is a refinancing (such as a Title Loan).
(2) PAYING THE DEBT DIRECTLY
Some individuals prefer to continue with car payments direct to the finance company. Reasons for doing this are if they received a great interest rate or if they want to keep the same loan term. This option merely requires that the individual keep paying whatever the contract says i.e. the bankruptcy does not affect or interrupt the payment schedule. This option might be chosen if the loan is going to end earlier than the bankruptcy case. When paying for the car through the plan, debtors don’t normally get the title to the car until the whole case is completed. By paying the car directly, the debtor gets title to the car when the loan is paid off. There is a disadvantage in that once the car payments are over, the debtor has lower monthly expenses. The trustee might then insist upon increasing the plan payment when the payments have ended. Paying directly is also a frequent option to protect a co-signer on a vehicle since anything not paid to the creditor can be collected from the co-signer.
(3) SURRENDERING VEHICLES
A person has the option of giving up their car in a Chapter 13 if the car just isn’t worth keeping. The balance after repossession and sale will be treated as a general unsecured debt with, hopefully, a very low dividend depending on income. Once surrendered, a debtor has the option of getting a replacement vehicle if the replacement turns out to be lower in cost than the surrendered vehicle. Bankruptcy is an opportunity to unload a car that needs lots of repairs, does not suit one’s lifestyle any longer, or is just too expensive. Since Chapter 13 cases run 3 to 5 years, debtors need to ask how likely it is that the current car will last until the end of the case and give it up if it’s not going to last.
(4) CARS REPOSSESSED, BOOTED, OR IMPOUNDED BEFORE FILING CHAPTER 13
This is a frequent reason for filing a Chapter 13. The car is repossessed by the lender, or seized by the City for parking tickets, and the debtor does not have the money needed to pay the missed car payments or tickets. If the owner files a Chapter 13, they can get the car back, and pay the balance or the crammed down value through the Chapter 13. The appeals court said a few years ago in Thompson v. GMAC that the car must be returned promptly once a Chapter 13 is filed. Most sophisticated auto lenders return the car without even asking for repossession fees, but they do require proof of physical damage insurance with the lender named as a loss payee or lien holder.