Are you behind on your car loan?
If you are, you aren’t alone – newly delinquent car loans are at an 8-year high. So how can you keep your car if you are 30, 60, or even 90 days behind?
Filing a Chapter 13 bankruptcy can bring your arrearage current and even lower your monthly payments. Keep reading to learn more!
Cure an Arrearage
When you file for bankruptcy, the past due amount on a secured claim is considered a pre-petition arrearage. You can “cure” that amount in a Chapter 13 bankruptcy over a period of up to 60 months while continuing to directly make your regular monthly payments to the secured creditor.
What’s more, you might even be able to reduce your interest rate!
Reduce the Interest Rate
You can lower your interest rate in a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, a secured creditor is permitted a fair interest rate, but that might be several points below the contract rate.
In 2004, the Supreme Court decided the Till case, 541 U.S. 465 (2004), which suggested that the appropriate interest rate in bankruptcy was prime plus 1-3%. The current prime rate is 3.75%, so you could reduce the interest rate on your loan to 5.75% – this could really impact your monthly payment!
Spread out the payments
In Chapter 13, you can either continue making your car payment directly to the creditor under the terms of a Plan or you can have the Chapter 13 Trustee make the payments on your behalf using funds paid to her.
If the car payments are being made through the Plan, they can be spread out over as long as 60 months (the maximum length of a Chapter 13 plan). Doing so can really reduce the monthly cost of keeping your car!
Upside down? Cram down!
And what if you owe more on your vehicle than it is worth? In some circumstances, you can reduce the amount owed on a vehicle to the value of the vehicle.
Let’s say you own a car that is worth $2,000, but you still owe $8,000 on it. If cram down is available in your circumstances, you could wind up owing just $2,000 on your vehicle with the balance being an unsecured claim.
There are some limitations on the availability of cram down, so it’s important to talk with an experienced bankruptcy attorney to determine if it can occur in your circumstances.
What about Chapter 7
In a Chapter 7 bankruptcy, your options are more limited. In order to keep a secured debt (and, in this case, your car), the debtor needs to sign a new contract with the secured creditor called a reaffirmation agreement.
A reaffirmation agreement is usually on the same terms as the old contract and the debtor is usually required to be current on payments when the debt is reaffirmed. Sometimes, a secured creditor may agree to a reducing the interest rate or some other changes, but they cannot be forced to do so.
Because you are eliminating other unsecured debts through the Chapter 7, your cash flows may be sufficiently improved to be able to afford your car payment.
Another Chapter 7 option is for you to redeem your vehicle: this means that you pay the lender the value of your car in a single payment.
It may ultimately make sense to walk away from the car altogether. Maybe its maintenance costs are too high or it is just too much of a car for you.
If that’s the case, you can surrender the vehicle to the secured creditor in both Chapter 7 and Chapter 13. And the bankruptcy will take care of any deficiency balance
If you are behind on your car payment, contact an experienced Lexington, Kentucky attorney at the Brackney Law Office, PLLC to understand your options. To speak to an attorney, visit our website or call (859) 559-4648 today.
The information contained on this blog is for general information only and should not be considered to be legal advice. Because your situation is unique, you should consult with an attorney to determine what course of action is right for you.