As a Colorado Springs bankruptcy attorney, in certain cases I’ve been able to use Chapter 13 to allow my clients to pay smaller monthly car loan payments. You may even be able to pay off your car loan and own the vehicle free and clear for a lot less than your current loan balance.
This post is one of a series on the mistakes people make before seeing a competent bankruptcy attorney about filing bankruptcy. These decisions often seem sensible at first, but almost always are made without knowledge of all of the available options.
If you need a vehicle but just can’t afford the monthly payments, you may figure that you’re going to lose the vehicle and don’t have any choice about it. You know the contract requires you to make the payments or you lose the vehicle. You may have been trying hard for months to keep your payments current, or putting up with late fees and threats of repossession. You may have already let the vehicle go except you’ve got to have a vehicle for work or to take the kids to school, and have no way to replace it. Due to the spotty nature of public transportation here in Colorado Springs you must have a vehicle in order to get around town. Without your car, you’ll be stuck, with no good options.
On top of everything else, your friends may have told you that a bankruptcy can’t help, at least for hanging onto the vehicle—that you still have to either make the payments and catch up if you’re behind, or else lose the vehicle.
That’s usually true, in a “straight bankruptcy,” a Chapter 7.
But it’s not necessarily true in a Chapter 13 case. When my clients here in Colorado Springs meet two conditions, I’ve been able to “cram down” the car loan, lowering their payments and allowing them to pay less over time. I have even been able to lower the interest rate they were paying.
The two conditions to be able to do a “cram down”:
1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years); and
2) At the time your case is filed, the market value of your vehicle is less than the balance on your loan.
If your vehicle loan meets these two conditions, we can essentially re-write your loan. We can reduce the total amount you must pay to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting in a radically reduced monthly payment.
What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.
And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.
So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed if you could keep that vehicle while having it cost you much less to do so. Oftentimes having a reliable vehicle is essential to achieving a successful re-start of your financial life. Before you lose that essential part of your financial plan, come see me to find out your options.
If you live in Colorado Springs or elsewhere in Southern Colorado and would like to discuss your situation, with no obligation, please fell free to call me at 719 227-8787.