If you enter into a Chapter 13 bankruptcy while you have a car loan, you may not have to lose your vehicle. However, it may not be wise to keep your car in every situation. We've got a few tips on how to manage your auto loan after you file for Chapter 13 bankruptcy.
What Can Chapter 13 Do for Your Auto Loan?
Depending on your situation, filing a Chapter 13 bankruptcy can do a lot for your car loan. Because a Chapter 13 bankruptcy is so long – three or five years – there are processes in place to help you keep your existing auto loan, or even get a new one if something unexpected happens to your current vehicle.
Chapter 13 bankruptcy can be especially beneficial if you are behind on your car loan payments, or owe more for your loan than the vehicle is worth. If you're in either of these situations, Chapter 13 can help you manage your situation and keep your car.
Keeping Your Auto Loan in Chapter 13
The first thing that happens when you file for bankruptcy is that an automatic stay goes into effect, which halts all collection attempts on you until the details of the bankruptcy can be worked out. When you file Chapter 13, you're saying that you can't afford to pay everything right now, but you're willing to work on it.
Chapter 13 is called a repayment bankruptcy and you're assigned a trustee by the court to manage your finances during the process. Your trustee works out a budget and a repayment plan you have to stick to. Because you're given time to pay your creditors, you typically get to keep property such as a reasonably-priced vehicle.
With the automatic stay in effect, your trustee can evaluate your auto loan situation and help you decide on a smooth route to take. If you're planning on keeping your car loan (or lease) when you file Chapter 13 you typically have two options, depending on the equity in your vehicle and if you're current on payments.
- Catch up on your auto loan through your repayment plan. If you were staring down the barrel of a repo due to late or missed payments when you filed for bankruptcy, you have the chance to add those missed payments to your bankruptcy repayment plan – this means a chance to bring your loan current! In order to stop the repossession for good, you have to stay current on both your loan and your repayment plan. If you're late with a payment again, even if your bankruptcy is successfully discharged, your lender has the right to repossess.
- Cramdown negative equity. If you owe more on your loan than the car is worth, you're in a negative equity position. If this is the case, you may be able to cramdown your auto loan so that you only pay for the fair market value of the vehicle. The remaining amount of negative equity is added to your unsecured debts and may be wiped out if you successfully complete your Chapter 13 bankruptcy. Cramdowns are only available in this bankruptcy chapter, and you must have owned your car for at least 910 days (two and a half years) prior to filing for bankruptcy.
When You Can't Keep Your Car
If your auto loan isn't eligible for a cramdown or you don’t want to add the payments to your repayment plan, you do have the option to voluntarily surrender your vehicle. If you don't think that you can keep up with both your car loan and your repayment plan, this may be a better option than allowing the lender to send out a tow company.
If you give your car back to the lender, you have to pay for any loan amount that remains after the vehicle is sold, called a deficiency balance. Paying this amount may be ultimately less expensive when you surrender the car yourself because you're skipping out on all the costs associated with repossession. A traditional repossession involves having to pay for storage and recovery fees, but a voluntary surrender doesn’t include these.
Getting a More Affordable Car Loan During Chapter 13
Since a Chapter 13 bankruptcy lasts for either three or five years depending on your situation, there's a policy in place to allow you to take on a car loan in an open bankruptcy. This is a benefit when you can't afford to keep the vehicle you have going into your Chapter 13. If you surrender it and then find that you need another set of wheels, it's typically possible to get a bankruptcy auto loan.
The process of getting a car loan during an open Chapter 13 starts with finding a lender that can work with borrowers facing bankruptcy or other challenges. This is typically a subprime lender that works through a special finance dealership.
Once you find a subprime lender, you need to get a sample buyer’s order from the dealer stating all the terms of the contract, including the highest possible interest rate you may qualify for, and the words "or similar" next to the make and model of the vehicle you chose. This caveat allows you to continue the process without starting over if the specific car your buyer’s order was drawn on has already sold.
If your trustee approves of the sample contract and your need for a car, they file a Motion to Incur Debt with the court. Once it's approved, you get an Order to Incur Debt from the court and you're able to return to the same dealership to finish your auto loan paperwork.
Finding a Bankruptcy Auto Loan
If you're looking for a dealership with the resources for bankruptcy auto lending, we've got you covered! Auto Credit Express has been connecting bankruptcy borrowers with local dealerships that are ready to get them into a vehicle for over 20 years. Our process is fast, free, and never comes with any obligation. Simply fill out our auto loan request form and we'll match you with a dealer who works with lenders that can handle bankruptcy car loans!