There are several factors to consider when dealing with auto loans in bankruptcy. The following information may help guide you when determining whether a Chapter 7 or a Chapter 13 bankruptcy is in your best interest. For instance: Are you current on your payments? What is the interest rate on your loan? What is the duration of your loan? Can you afford to keep your car?
If you have questions about auto loans in bankruptcy and you would like an immediate answer, please give us a call at 785-379-3600 for a FREE Consultation over the phone or in person or you can email us now.
Auto Loans in Bankruptcy – Chapter 7
In a Chapter 7 Bankruptcy, you will have to decide whether you would like to surrender your vehicle, or whether you intend to reaffirm on the debt. When you reaffirm on the debt, the creditor will have you sign a reaffirmation agreement, stating the terms of the loan. The court will allow you to enter into a reaffirmation agreement if you can show that it is not an undue hardship.
Generally speaking, if your monthly budget shows a surplus equal to or greater than the car payment, an undue hardship is not presumed. Also, the lender is under no obligation to enter into a reaffirmation agreement. If you are behind on your payments, your creditor may also refuse to enter into such an agreement with you.
One important thing to keep in mind if you do enter into a reaffirmation agreement: You are back on the hook for the debt. That means if you fall behind on your payments and your vehicle is repossessed, that debt will be considered post petition debt, and thus non dischargeable.
In general, most, if not all post petition debts are non dischargeable. This means that your creditor can now pursue collection efforts against you, such as harassing phone calls and even garnishment.
Auto Loans in Bankruptcy – Chapter 13
In a Chapter 13 Bankruptcy, you have a few more options at your disposal. You can choose whether to keep or surrender the vehicle just like in a Chapter 7; however, the similarities end there. If you decide to keep your vehicle, you will have the choice of paying back the auto loan either through the plan or outside the plan.
Chapter 13: Outside the Plan
If you propose to pay your car loan outside the plan, you will be paying the vehicle back under the original contract terms: The duration and interest rate will stay the same. There are a couple reasons why someone would choose to pay their auto loan outside the plan.
- Perhaps you already have a low interest rate (4.75% or less), or your car is worth pretty much what you owe on it (i.e. not upside down on your loan).
- Maybe the length is 72 months, and if you were to pay back the automobile through the plan, you would actually be raising your payments (remember, you can only go 60 months in a Chapter 13).
- The final reason to pay an auto loan outside the plan is if someone cosigned on your loan, and you want to protect their credit. If the car is paid through the plan, many credit bureaus will flag it as a “slow pay” which will negatively impact a credit rating.
Chapter 13: Through the Plan
If you pay your vehicle back through the plan, you will be able to pay back the loan at the “till” rate, which is set by the government. Currently, the till rate is 4.75%. Many people who have poor credit are unable to get low interest auto loans.
For example: Lets say you got a $15,000 auto loan at Acme Car Loans, Inc at 18% interest over 5 years. If you pay your car loan through a Chapter 13 plan, you will only have to pay 4.75% interest instead of the original 18%. You may even be able to pay your car off sooner, and with smaller payments.
Cram Down and the 910 Day Rule
One of the most powerful feature of a Chapter 13 is the ability to “cram down” auto loans in bankrutcy. A cram down allows you to pay back the value of the automobile as opposed to the loan amount. The catch is IF and ONLY if you have owned the vehicle for over 910 days (two and 1/2 years). If you have owned the car for one day less than 910 days, you can only cram down the interest rate.
Lets take our previous example. $15,000 auto loan, 18% interest, 5 year term. You have owned the vehicle for over 910 days. Lets also assume that NADA book value of your car is $10,000. In this example, you can pay back the value of the car through the plan at 4.75% interest – a substantial reduction.
Chapter 7 & 13 treat auto loans in bankruptcy differently. Are you current? High Interest rate? Can you afford it? Feel free to give us a call at 785-379-3600 for a FREE Consultation over the phone or in person or you can email us now.