Your Car in Chapter 13 Bankruptcy: An Overview

Chapter 13 bankruptcy offers several benefits that can help you keep your vehicle. If you're behind on your car loan payments, you can catch up through your Chapter 13 plan. Even better, if you owe more on your car loan than the car is worth, you might be able to reduce the amount owed. But sometimes, keeping a vehicle in Chapter 13 bankruptcy isn't feasible. Find out when you can keep a car in Chapter 13, what to do if you need to finance another vehicle during Chapter 13, and more.

How Chapter 13 Bankruptcy Helps You Keep Your Car

Chapter 13 bankruptcy offers ways to help you keep or get out from under vehicles. When you file for Chapter 13 bankruptcy, most creditors must stop any collection efforts against you because of an order called the "automatic stay." (11 U.S.C. § 362.) Once in place, a car lender can't repossess your car without permission from the court. You might even be able to get a repossessed car back using Chapter 13 if the lender repossessed it shortly before you filed.

But what you'll likely find most helpful are the options you'll have after filing.

Surrendering Your Vehicle in Chapter 13

If you have a car payment that you can't afford, or you're making payments on a car that's unreliable or needs costly repairs, it might make sense to let it go. In Chapter 13, you can get out from under the payment by surrendering the vehicle to the lender.

Catch Up on Past-Due Car Payments in Chapter 13

If you're behind on your car loan or lease and you file for Chapter 13 bankruptcy, you can keep your car if you pay the amount you're behind through your repayment plan and continue to make your regular car payments. The lender can't repossess it as long as you're following the plan. (11 U.S.C. § 1322(b)(5).)

Chapter 13 Car Loan Cramdown Explained

If the amount of your car loan is more than the value of your car, you might be able to reduce or "cram down" your loan amount in Chapter 13 bankruptcy. (11 U.S.C. § 1325(a).) This situation is common because cars depreciate quickly.

A cramdown lets you reduce the amount you owe to equal the car's value. Whatever is left becomes unsecured debt and must share your disposable income with your other unsecured debts.

However, there is another hurdle you might need to meet. Some jurisdictions require you to have bought the car more than two-and-a-half years (910 days) before the bankruptcy filing. (11 U.S.C. § 1325(a)(9).)

Can You Afford to Keep Your Car in Chapter 13?

Before you can keep your car, you must prove that you can afford to pay all debts required through the Chapter 13 plan, which can get expensive. Specifically, in addition to paying monthly living expenses, including your house and car payments and any arrearages on both, you must be able to pay your priority debts and any nonexempt property equity (equity not protected by a bankruptcy exemption) you might have.

Car Equity and Chapter 13 Plan Payments

You're allowed to keep, or "exempt," a certain amount of property using bankruptcy exemptions. (11 U.S.C. § 522.) When reviewing your state bankruptcy exemptions, look for the motor vehicle exemption or wildcard exemption to determine how much equity you can protect.

You must pay the value of any nonexempt property that you own to your creditors through the plan. Because of this rule, having substantial nonexempt equity in your car or other property could increase your plan payment substantially. You must also consider any other nonexempt property equity. If you have a significant amount of nonexempt equity and it exceeds your disposable income, you won't be able to afford the required Chapter 13 plan payment.

Example 1. Suppose your state exemptions allow you to retain $5,000 in vehicle equity. If you have $15,000 of vehicle equity, you'll have to pay $10,000 to your unsecured creditors through your bankruptcy plan.

Example 2. Suppose that in addition to $10,000 in nonexempt vehicle equity, you also have a nonexempt antique diamond ring worth $20,000, giving you a total of $30,000 in nonexempt equity that you must pay through the plan. If your disposable income is $30,000 or more, the court will confirm your plan. If you have less than $30,000 in disposable income, you won't qualify for Chapter 13.

Proving Your Car Payment Is Reasonable in Chapter 13

In a Chapter 13 bankruptcy, your repayment plan must show that all of your disposable income—that's your income minus your necessary living expenses—is used to repay your unsecured debts under your repayment plan. In determining your disposable income, you can deduct only expenses reasonably necessary for your and your dependents' support.

Because your creditors want as much as possible, they'll object if it appears that you're unreasonably using funds. For instance, a creditor might object, claiming you're making an excessively high car payment or paying for a second car you don't need instead of paying the funds to creditors as part of your disposable income.

It isn't uncommon for a court to decide that a substantial luxury car payment isn't reasonable or that you need only one car to go to work. In both cases, you might not be allowed to use the car payment when computing your disposable income.

Instead, you'd only be able to claim an expense consistent with one lower-priced car. Learn when you can keep two vehicles in Chapter 13 bankruptcy.

What Happens to a Paid-Off Car in Chapter 13 Bankruptcy?

If you pay off your car during your Chapter 13 plan, which most do, you'll own it free and clear when your bankruptcy ends. It's likely to happen if the remaining time on your car loan is less than five years. One of the benefits of filing for Chapter 13 bankruptcy is that you come out of it financially free.

At the end of the Chapter 13 plan, most people owe only long-term debt, such as a mortgage or a student loan. After you complete your payments, everything else is either fully paid or wiped out with the bankruptcy discharge. (11 U.S.C. § 1328.)

Getting Your Repossessed Car Back Through Chapter 13

It's possible to recover a vehicle by filing a "motion for turnover." For instance, suppose your car is necessary to your household because you need it to get to work. If you can afford to make the current monthly payment and catch up on the back payments through your Chapter 13 plan, you might be able to keep it.

A motion for turnover orders the lender to return your car. However, your lender might return your vehicle without requiring a turnover motion if your bankruptcy plan pays the lender. A local bankruptcy attorney can explain what to expect in your area.

Car Financing During Chapter 13 Bankruptcy

It's possible to finance a vehicle while paying into a Chapter 13 plan. However, you'll need permission from the bankruptcy court. Your bankruptcy lawyer can explain the process and evaluate the likelihood of the judge approving a motion to incur additional indebtedness.

Need More Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.