If you are one of the 7 million Americans late on your car payments and living in fear that your car will be repossessed, consider how Chapter 13 bankruptcy can save your wheels.
Losing your car can accelerate a torrent of nasty financial consequences.
No car, no way to work.
No work, no income.
So, what can a Chapter 13 bankruptcy do to put you back on the road?
All chapters of bankruptcy impose an injunction on creditor efforts to collect debts, or enforce liens, automatically when you file. That’s the automatic stay; it applies whether or not the creditor knows about it.
So, file bankruptcy and any collection actions taken without court permission are void and legally ineffective. If they pick up your car after you’ve filed, you can compel its return.
The only exception to the stay applying automatically is if you’ve had two bankruptcy cases dismissed in the past 12 months. More on multiple dismissals.
Spread out car payments
Chapter 13 allows you to put forward a plan to restructure your car loan. The remaining payoff balance on your car loan can be spread over 60 months.
Unless your car loan is very new, or the original term very long, that probably lowers what you pay each month through the plan.
Reduce interest rate
You can adjust the interest rate on a car loan paid through the plan to the current day, market rate. As I write, that interest rate in California is between 4 and 5%.
This power to lower the interest rate is central to a successful readjustment of a high interest car loan. It’s of little help if your loan is less that today’s market rate.
But Chapter 13 in the states of the 9th Circuit has another trick up its sleeve.
Strip out loan add ons
Part of a Chapter 13 plan can be cutting the car loan down to the portion of the loan that financed the car itself; you can knock out any part of the loan that paid off an underwater trade-in, or a service contract, or gap insurance.
The 9th Circuit said in Penrod that these additions to the amount financed were not protected by the 2005 bankruptcy amendments that gave special consideration to car lenders.
So, you can pare down the car loan that has to be repaid to just the amount of the loan balance used to buy the car itself, and not all the extras.
Deal with other debts
You don’t just file bankruptcy on one debt; bankruptcy includes all your debts.
Some may be absolutely dischargeable, perhaps without paying anything on them.
Some liens can be wiped out. Back payments on home loans can be caught up in Chapter 13.
Chances are that there’s more going on in your financial life than just the trouble with your car loan.
An experienced bankruptcy lawyer can help you look at the big picture and propose a solution to keep you trucking.