Chapter 7 is limited in how it can help with your vehicle loan. Chapter 13 can do much more—buy more time and often reduce your payments.
Problems to Solve
Last week we addressed the kind of help Chapter 7 “straight bankruptcy” provides on your vehicle loan. Mostly it clears the deck of your other debts so that you can afford to keep your vehicle. Hopefully Chapter 7 accomplishes that.
But what if you can’t afford the contractual monthly payments even then? What if your vehicle isn’t worth what you owe on it? What if you’re behind on your payments or insurance and can’t catch up fast enough?
If you can’t or don’t want to keep your vehicle Chapter 7 also gives you the option of surrendering it. The benefit is that it legally write off your obligation to pay the “deficiency balance.” That’s the often surprisingly large remaining debt after a vehicle repossession or surrender. Writing off the debt is better than being saddled with it if you don’t file bankruptcy.
But what if you definitely need to keep your vehicle but can’t do so under Chapter 7? What can Chapter 13 do for you better?
Chapter 13 Buys Time—Often much More Time
If you are late on your vehicle loan payments, filing a Chapter 7 case will prevent an immediate pending repossession. But then virtually always you’ll have to catch up on any arrearage within the next month or two. That’s of course on top of keeping up on ongoing monthly payments.
Chapter 13 usually gives you much more time. Instead of giving you weeks to catch up, usually you’d have many months to do so. Exactly how much time you’d have depends on many factors. But generally you’d start paying your regular payments as they became due, and then chip away at the arrearage over the course of at least several months.
Chapter 13 “Cramdown” May Reduce Monthly Payments—Sometimes Significantly
You don’t always have to pay your regular monthly payments as they come due after filing under Chapter 13. If you qualify for “cramdown” you would likely pay less per month on the vehicle loan—possibly much less.
Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan if your vehicle is worth less than you owe. To qualify your vehicle loan must be more than 910 days old at your Chapter 13 filing. (That’s slightly less than two and a half years.)
The loan payments are reduced because the loan is restructured based on the value of the vehicle. You pay that secured portion of the loan through monthly payments. Those payments are usually much less because they are based on the vehicle value instead of the contract balance.
Also, the payments are further reduced under Chapter 13 if the amount to be paid is to be paid out over a period longer than the time left on the contract.
Finally, if your vehicle loan has a relatively high interest rate, you can often also reduce that rate.
Each of these helps reduce the monthly payment on the loan.
You May Not Need to Catch Up on Missed Payments
If you qualify for cramdown you usually don’t have to pay any missed payments after filing a Chapter 13 case. You just pay going forward, at the reduced monthly payment.
Not having to scramble to pay missed payments is a huge benefit. You can concentrate on your most important obligations, such as the crammed down monthly payment.
Catching Up on Lapsed Vehicle Insurance
If you’d fallen behind on your vehicle insurance, that would be an extremely important obligation to focus on. You DO have to reinstate lapsed insurance quickly in order to keep your vehicle—in either Chapter 7 or 13. So the fact with cramdown you may not have to pay any missed payments or else be allowed to catch up more slowly means that you’d have more money available to reinstate your insurance.
No doubt the benefits listed above sound great. It’s great to have much more time to catch up or to not need to catch up at all. It’s great to have reduced monthly payments, to pay less overall on a vehicle until it’s yours free and clear.
But these benefits would make more sense and be even more impressive if we showed how they work in practice. We’ll do that in our blog post next time.