When you file for Chapter 13 bankruptcy, your debts are not magically wiped away. Instead, a bankruptcy trustee looks at how much money you make each month, how much you need to live on and then orders the rest to go toward a payment plan. Your debts are restructured and you pay off your creditors in a court-ordered plan that usually lasts three to five years. During this process, whether or not you can keep some of your property, like a house or a car, depends on several factors.
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You can usually keep a vehicle in a Chapter 13 bankruptcy. However, there are exceptions about selling or trading your car or truck for something cheaper.
Keeping Your Vehicle in Chapter 13 Bankruptcy
During most Chapter 13 bankruptcy proceedings, you can keep your vehicle. After all, this is usually how you get to and from work, which enables you to pay back your creditors. However, you may not be able to keep your current vehicle.Your vehicle expenses must be reasonable during the bankruptcy proceeding. If you own a very expensive car and have high monthly car payments, you may be ordered to reduce this expense by trading your vehicle for a less expensive model that carries a lower loan payment.
Chapter 13 Can Help With Your Car Loan
If your auto loan is one of the debts you have trouble paying each month, Chapter 13 may help. Through these proceedings, you may be able to have the amount you owe reduced to the value of the vehicle or have the interest rate reduced. This is known as a cramdown, and it depends on how long ago you purchased the car. Chapter 13 also helps you keep your vehicle by preventing repossession. In most bankruptcy proceedings, there is an automatic stay, which means creditors can no longer move forward with collection efforts against you, and the lender of your auto loan will likely no longer have the right to repossess your vehicle.
You May Benefit From Giving Up Your Vehicle
While you can usually keep your car during Chapter 13, you may benefit from giving up your car to the lender if your family has another vehicle you can rely on or if you can transition to public transportation. The court may permanently discharge you from paying the remainder of the auto loan if you voluntarily surrender the vehicle to the lender. The downside is that this discharge occurs at the end of your payment plan, which is years away. You do not have to pay the debt during this time and the lender cannot send you to collections, but the debt will still be on your record until the bankruptcy proceeding is over.