Are you looking over your shoulder for the repo man every time you park your car?
You’re not alone.
Delinquent car loans are on the rise: almost 1 in 20 vehicle loans are in default.
If you’re in that group of Americans struggling to pay for your wheels, there are solutions in bankruptcy.
If you can’t make the car payments, your money troubles probably extend beyond the car. Bankruptcy may offer an exit ramp from debt worries.
So, what can bankruptcy do for you and your delinquent car loan?
Spread out the car payments
You can stretch out the repayment period in Chapter 13.
Whether the loan is new or of long standing, your plan can spread the balance you owe at filing on your car loan over five years (the maximum length of the Chapter 13). That makes the monthly cost of keeping your wheels less.
Reduce the interest rate
Chapter 13 can lower the interest rate on a car loan. In a bankruptcy case, the lender is entitled to a fair interest rate but maybe not the interest rate on the contract.
The Supreme Court in a case called Till suggested that rate is the prime rate plus 1-3% for the risk factor, since bankruptcy debtors aren’t the prime borrowing candidates who get the prime rate.
Lower interest may be the trick to making the car affordable.
Limit the debt to the car’s value
You may be able to strip the loan down from the contractual balance to the value of the car in Chapter 13. That’s often called “cramdown”.
Cramdown is powerful since for the early years of most car loans, the debt is greater than the value of the car.
If the loan is the one you used to buy the car, you can’t cram down the loan for the first 910 days from the loan. (That’s the shorthand expression of the rule. Get the gory details here.)
If the loan is a refinance, you can cram it down any time. Or if the vehicle is used in your business, you can cram down any time.
In Chapter 7, your options for keeping the car are fewer. You can reaffirm the debt, agreeing to pay as originally agreed. That does little to make the car more affordable. It may work if you’ve shed other debts in the Chapter 7 that frees up money to make the car payment.
Or, you have a choice to redeem the car-regardless of the age of the loan. Redemption means that you pay the lender the value of the car as of the bankruptcy filing in a single payment. If you can raise the money, it’s often a great money saver.
Walk away from a lemon
Either Chapter 7 or Chapter 13 allow you to walk away from a car loan. You surrender the car and have no exposure to the unpaid loan balance.
This may be the best choice if the car is a lemon, or if you simply bit off more car than you can afford.
You don’t have to have a reason if you simply want out of the deal. Give the car back and the bankruptcy discharge protects you thereafter.
An experienced bankruptcy lawyer can walk you through the options to keep you driving.