Chapter 13 bankruptcy is a common type of individual consumer debt relief that allows filers to restructure their debts into a three to five-year repayment plan suited to their income. Unlike Chapter 7 liquidation bankruptcy, Chapter 13 is often a better fit for filers with a steady income who want to keep the properties they have a secured debt on. If you’re considering filing to receive debt relief, Behm Law Group, Ltd. can help you put together a strong petition for Chapter 7 or Chapter 13 bankruptcy in Mankato, MN.
When you file for Chapter 13 bankruptcy, several different things will happen to your debts depending on the type of debt, the amount owed, and other circumstances. For example, your unsecured debts will be only partially paid through your repayment plan. While your secured debts can be included in your chapter 13 plan to be paid in full, they can oftentimes be paid under adjusted terms that are very favorable to you. A secured debt is a debt tied to a property or other asset that serves as collateral/guarantee. In other words, if you don’t pay the debt, the creditor can take/repossess the asset that serves as security or collateral for the debt.
If you own a car you haven’t paid off the loan for yet, several things can happen to that vehicle when you file for Chapter 13:
- Keep It: If you’re caught up or current on your car loan, you can specify in your repayment plan that you intend to continue making the regular payments directly to the creditor rather than making your payments to the chapter 13 trustee and then having the chapter 13 trustee make the payments to the creditor. To do this, you must meet the Best Efforts requirement by demonstrating not only that the value of the vehicle is at least as much as the amount of the debt against it but also that interest rate on the loan is reasonable (in the 5% to 7% range) and not unduly high (in the 8% to 20% range).
- Repossession: Filing for Chapter 13 will stop the repossession of your car with the power of automatic stay. The automatic stay legally halts any creditors’ attempts to collect debt payments or repossess properties. The stay applies throughout your bankruptcy case, and if you include your loan in your repayment plan, your creditors will no longer be able to repossess your car.
- Surrendering: If you don’t want to include your loan in your repayment plan, you can surrender your car to the bank you received the auto loan from. This typically occurs if the filer cannot afford to repay the loan or the car is unreliable. The creditor will be able to take the vehicle, sell it, retain the sale proceeds and apply the sale proceeds against the debt but the creditor will not be able to demand further payment from you. Whatever debt or claim is left following the sale of the vehicle will be paid by the chapter 13 trustee as a general unsecured claim like credit card debt, medical debt, etc.
- Arrearage: If you are behind on payments on your car loan, you can include the past due payments you owe in your repayment plan and continue making the regular payments. For example, if you’re $2,000.00 behind on your vehicle loan and your regular monthly vehicle payment is $400.00, you would be five (5) months in arrears with your vehicle loan payments. You could include the $2,000.00 arrearage in your chapter 13 plan and the trustee would pay it back. However, you would be required to continue making your regular, monthly vehicle payments of $400.00 directly to the creditor going forward and you would be required to remain current or up to date with your ongoing vehicle payments.
- Loan Reduction: If the value of your car is less than the amount you owe on your loan or if the interest rate on the vehicle loan is unduly high, you might be able to reduce the amount you owe and reduce the interest rate and pay off the loan through your chapter 13 plan. This process, called cramdown, is common when it comes to car loans because car values quickly depreciate. You still owe the amount that is reduced, but it is paid under adjusted terms that are favorable to you. In order to cramdown the amount of the debt to the present value of the vehicle, the subject vehicle loan must be more than 910 days old. In other words, you must have incurred that debt more than 910 days before you filed for bankruptcy relief. For these kinds of loans, you will be able to cramdown both the amount of debt down to the present value of the vehicle and the subject interest rate. For example, presume that you have a vehicle that you owe $10,000.00 on and that the vehicle is presently worth $5,000.00 and further presume that you took out the loan on December 1, 2015. Further, presume that the interest rate on the loan is 18%. Presume even further that you filed for bankruptcy relief on December 1, 2019. This loan would have been incurred or taken out more than 910 days before your bankruptcy case was filed. With this sort of loan, you would be able to cramdown the debt from $10,000.00 to $5,000.00 and you would be able to cramdown the interest rate from 18% to 5% or 6% in your chapter 13 plan. Instead of making your vehicle payments directly to the creditor, you would make them to the chapter 13 trustee and the chapter 13 trustee would pay the creditor the $5,000.00 at 5% or 6% interest. The other $5,000.00 worth of debt that exceeded the value of the vehicle and was crammed down would be paid by the trustee as a general unsecured claim like a credit card debt or a medical debt.
With regard to vehicle loans that were incurred or taken out less than 910 days before you filed for bankruptcy relief, you would not be able to cramdown the amount of the debt to the present value of the vehicle. However, you would still be able to cramdown the interest rate if the interest rate were unduly high. For example, presume that you purchased a vehicle on December 1, 2018 and that you filed for bankruptcy relief on December 1, 2019. Presume further that you owe $10,000.00 on the vehicle but that it is presently worth only $5,000.00. Presume further that the interest rate on the vehicle loan is 18%. This type of vehicle loan can still be included in your chapter 13 bankruptcy plan but you would not be able to cramdown the $10,000.00 debt to the $5,000.00 value of the vehicle. However, you would still be able to cramdown the interest rate from 18% to 5% or 6%. It may still be quite advantageous for you to have the vehicle loan paid by the chapter 13 trustee through your chapter 13 plan because the interest rate could be significantly reduced.
If you’re planning on filing for Chapter 13 bankruptcy in Mankato, MN and want to know more about how your debts and properties will be handled, contact Behm Law Group, Ltd. today at (507) 387-7200 or via email at stephen@mankatobankruptcy.com.
