Falling behind on a vehicle loan is a scary experience, especially if you are rely on your vehicle to get to work (or to find work!), and to take care of life’s other necessities. It is all too easy to get your vehicle repossessed—vehicle lenders’ contracts usually let them to do as soon as you are late on your payment.
Limitation under Chapter 7 “Straight Bankruptcy”
Once you have fallen behind on your payments even regular Chapter 7 bankruptcy provides some help, but it’s limited.
Filing a Chapter 7 bankruptcy case DOES stop the lender from repossessing your vehicle through the “automatic stay.” It protects you and your assets from virtually all of your creditors’ actions against their collateral, including vehicle repossession.
Then, if you want to surrender the vehicle because you can’t or don’t want to make the payments, Chapter 7 will usually give you until about a month or so after filing to keep your vehicle without making any payments, at which point you’d give up your vehicle after having a chance to take out your belongings. And then—very importantly—you will receive a discharge (legally write off) of the “deficiency balance,” the amount that you would owe after the lender sells the vehicle and credits the proceeds to your account balance.
Or if instead you want to keep your vehicle and you are current on it, you can “reaffirm” the debt. This means you exclude it from the discharge that you are getting from your other debts, consistently make the payments, and hopefully eventually pay it off.
But if you want to keep the vehicle and are behind on your payments, the lender will most likely require you to catch up within a month or two after filing the Chapter 7 case. Otherwise you would not be allowed to keep the vehicle. In fact although the “automatic stay” protection is generally effective throughout the three to four months that a standard consumer Chapter 7 is open, that period could well be shortened if the lender files a motion to lift the “automatic stay” and gets court permission to repossess.
So if you want to keep your vehicle, Chapter 7 may be a good option if you are current on your loan or can get current within about two months or so after the bankruptcy filing.
Deal with Vehicle Loans in Arrears through Chapter 13
However, if you need more time than that to catch up on your vehicle loan, then you may well need the addition power of a Chapter 13 “adjustment of debts.” In most situations it allows you much, much more time to catch up—a period of as much as three to five years instead of just a month or two.
Under Chapter 13, you and your attorney put together a formal payment plan dealing with all of your debts including your vehicle loan, which states how much you are going to pay per month to all of your creditors, and which creditor will receive how much and when.
If you entered into your vehicle loan relatively recently—within 910 days, or about two and a half years, of when you file your case—then your plan must pay enough money to your lender during the life of the plan to catch up on the missed payments. That proposed plan goes through a court approval process, and the payment terms can be challenged by the creditors and the Chapter 13 trustee based on whether it funnels enough to the vehicle creditor and does so fast enough. Then once the plan is “confirmed” (approved) by the bankruptcy judge, the creditor has to live with the terms, as long as you comply with them as well.
If you entered into your vehicle loan more than 2 and a half years before filing your Chapter 13 case, you do not need to catch up on missed payments at all. In fact, if your vehicle is worth less than the loan balance, you can usually reduce your monthly payment, lower your interest rate, and pay less on the loan overall—often thousands of dollars less. Then you would own the vehicle free and clear at the end of the case.
If you live in New Jersey, the Law Office of Andrew B. Finberg can help you tackle your vehicle loan problems through either Chapter 7 or Chapter 13. Please get in touch with us. For a free, no-obligation consultation, call (856) 988-9055 or use this form . We look forward to serving you.