Keeping Your Car In A Chapter 13 Bankruptcy In 2016

Posted by William Kain on July 13, 2016 at 4:44 PM
William Kain

Keeping_Your_Car_In_Chapter_13_Bankruptcy.jpgLast week I discussed the timing of the filing of a Chapter 13 Bankruptcy case specifically in relation to mortgage defaults and foreclosure. Chapter 13 Bankruptcy is commonly filed by people with debt problems who are facing defaults in secured loans, such as home mortgage loans. The most common secured loan, though is a vehicle loan. Because of the retail price of both new and used cars, many if not most consumers have to finance the purchase of a vehicle.

When You Get A Car Loan, You Grant The Lender A Security Interest In The Vehicle.

It’s a commonplace transaction: in exchange for the money to pay for the vehicle purchase, the borrower grants the lender a security interest in the vehicle. The title to the vehicle shows the borrower’s name as the owner, with the lender identified as a secured party. That way, if the borrower wishes to sell the car before the loan is paid in full, or if the vehicle is involved in an accident and the borrower’s insurance company “totals” the car, the lender can be sure to have the loan paid. Once the borrower/purchaser pays the loan in full, whether by completing payments as scheduled, selling or trading in the vehicle or through an insurance settlement, the lender will send the borrower something called a lien release card that will show that the vehicle is no longer subject to the lender’s security interest. 

If the borrower defaults on the loan, though, the lender has the right to repossess the vehicle at any time after the loan goes into default. And unlike a mortgage foreclosure on real estate, which is strictly governed by statutes which require mortgage companies to follow procedures to the letter of the law, a secured car lender is given the right of “self-help” repossession, which is accomplished quickly. Typically a borrower with a defaulted vehicle loan will not be given any advance notice of the intent of the lender to repossess a vehicle. It often happens when the borrower is away from her car while she is at work, or in the wee hours of the morning, when the borrower is asleep and the vehicle is unintended.

the process to repossess a vehicle Is Easy compared To The governed procedures of foreclosure

Why? There are several reasons. First and foremost, motor vehicles are, by definition, portable, while real estate is not. So a borrower has the ability to “hide” a motor vehicle where a property owner cannot “hide” real estate. There are other reasons for self-help repossession of motor vehicles. There is a strong public interest in maintaining home ownership that is simply not the case with vehicle ownership. Real estate is seen by the law to be unique - each parcel of real estate is different. So allowing the ownership of unique property is favored by the law. Vehicles, on the other hand, are mass-produced. So if an individual has a five-year-old Chevrolet sedan repossessed, there a literally thousands of similar vehicles in the world to replace it. Also, real estate is an appreciating asset. That is, in most cases real estate is worth more money as the years go by.

Vehicles, on the other hand, depreciate in value. So the car that is worth $10,000 today will be worth little or nothing ten years from now. For all these reasons, car lenders are giving a different status that real estate mortgage lenders, and car lenders are allowed more leeway in enforcing a security interest in a vehicle. But Congress recognizes that vehicle ownership is still important.The ability to drive to work is an obvious component to a person maintaining employment. And while vehicles do, indeed depreciate, they are still valuable assets for most of their useful lives and vehicles can be quite expensive to replace. So Congress gives individuals who have car loans on which they have defaulted protection through a chapter 13 bankruptcy.

If You file a chapter 13 Bankruptcy You Have the option to pay Your car loan through the chapter 13 plan.

This is indeed an option for an individual for whom the car loan will be paid more than 36 months, but less than 60 months after a chapter 13 case is filed. Individuals who have below-median household income can choose to pay their car loan directly, if in fact the loan will be paid in full after the last payment in a chapter 13 plan is completed. For example: a person who has 52 months left on a car loan can choose to file a 48-month chapter 13 plan and propose to pay this long-term loan outside of the chapter 13 plan. Or that individual can propose to pay the loan during the 48 months the chapter 13 case is in effect, through the monthly payments the individual makes to the chapter 13 trustee.

However, this option does not exist if the loan will, by its terms, be paid in full before the chapter 13 plan is completed.So in the above example, if the person with the car loan with 52 payments remaining files a 60-month chapter 13 plan, that individual must pay the car loan through the chapter 13 payments made to the trustee. Remember that a person with above-median household income must propose a 60-month plan, so for those individuals, the car loan must have more than 60 payments remaining to be paid for directly by the chapter 13 debtor, outside of the chapter 13 plan payments. 

chapter 13 allows a debtor to do to restructure his or her car loan.

In chapter 13, the car payments can be “stretched out” for the life of the plan. So for instance, if a debtor has a car payment that is difficult to afford, and there are 24 months remaining on the car loan, the debtor can propose to pay the car loan over the lifetime of the plan - at a minimum, 36 months, up to 60 months. So the principal balance of the loan, instead of being due in two years, can now be paid over as many as five years. By reducing the principal that must be paid each month, the debtor’s car loan payment will be reduced.

Another feature of chapter 13 is that the interest rate on car loans can also, in some cases, be lowered. When we file chapter 13 cases, the interest rate on car loans is called the “Till” rate, after the appellate case that determined that the contract interest rate on a car loan does not have to govern the loan terms. Rather, there is a calculation, based on the existing prime interest rate, that sets the interest rate on car loans. For our office, we typically set the interest rate at 5.25%. For many of our clients, this reduction in interest rate is a significant saver on the cost of the car loan. Many of our clients’s credit scores are not good, and the car loan interest rates are very high - sometimes as high as 20%. So by having a longer period of time available to make a loan payment, and in many cases having a lower interest rate on the loan, our clients can see a significant savings in their cost of living.

In most You will have to pay the contract balance of Your car loan through the plan

Although as mentioned above, the loan interest rate can be lowered and the term of the loan extended. In some cases, however, the loan balance can also be lowered. When a purchase-money loan was entered into more than two and a half years (910 days) prior to the day the chapter 13 case was filed, the debtor can propose to pay the retail value of the car or truck, rather than the loan balance, if, of course the value of the vehicle is less than the loan balance. This exception also applies if the loan is not a purchase-money loan. So in a case where an individual applies for a loan and offers an already-paid-for vehicle as collateral for the loan, it does not matter how long before the chapter 13 case is filed. That loan will be paid in the chapter 13 plan based on the current loan balance, or the value of the vehicle, whichever is lower.

There is one other exception to the 910-day rule. If the vehicle is not used for personal use by the debtor, then it does not matter when the chapter 13 case is filed. So in the (rare) occasion where a self-employed individual finances the purchase of a vehicle that is used exclusively in his or her business, and has no personal use features, then in that case the car loan is paid at the value of the vehicle, or the current loan balance, whichever is lower.

One unique feature of chapter 13 is that if a debtor’s vehicle has been repossessed and the vehicle has not yet been sold at an auction by the lender, when a chapter 13 case is filed that proposes to pay the car loan through the chapter 13, the vehicle must be returned to the debtor. So for individuals who have lost their car to repossession and want to get the vehicle back, a prompt filing of a chapter 13 case can restore the car to the debtor, and allow that person the ability to pay the car loan, at more favorable terms, through a chapter 13 plan. However, if the filing of the chapter 13 case is delayed and the vehicle is sold before the chapter 13 case is filed, the car will not be returned to the debtor. So promptly filing a chapter 13 case after a repossession is an absolute must.

What about chapter 13 and car leases?

If a chapter 13 debtor has a vehicle that is being leased, that person has a decision to make at the outset of the chapter 13. Every chapter 13 plan has a provision for “leases and executory contracts.” In a chapter 13 plan, an individual who is leasing a vehicle has to decide whether to continue the lease agreement, or to reject the lease. If the individual decides to continue the lease, that person indicates in his or her chapter 13 plan that he or she intends to “assume” the lease. If no provision is made for assuming the lease, then the lease is deemed rejected. Unlike secured car loans, there is no statutory allowance for re-writing lease terms more favorable to the chapter 13 debtor. So the chapter 13 debtor decides whether to assume the lease and continue making the lease payments, or whether to reject the lease. If the debtor rejects the lease, the leasing company is entitled to the return of the leased vehicle.

In MN There is an extension of the redemption period after a home mortgage has been foreclosed

In Minnesota a person can continue to reside in his or her home for six months following the foreclosure of the mortgage loan. Continued residence is key, but if the person meets that requirement, the six month redemption period can be a real help for someone who needs to save money in order to find a suitable place to live.That six month redemption period can be extended by filing a chapter 13, although again, timing the filing is an issue. If the chapter 13 case is filed with less than 60 days remaining in the redemption period, the chapter 13 debtor will have 60 days from the date of filing to continue in his or her redemption period. So if the case is filed one day before the six month redemption period is set to expire, the redemption period will be extended to an additional 60 days after the date of filing. It’s not used often, but in certain cases, the extension of the redemption period can actually be used to come up with the money necessary to redeem the interest in real estate. It’s another tool out there for homeowners who need a bit more time in their home.

To learn more about Bankruptcy and your options sign up for a Free, no-obligation Bankruptcy Consultation with one our experienced Bankruptcy Lawyers MN. With over 47+ years of combined Bankruptcy experience you can rest assure we have the answers you need and deserve. 

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Topics: Bankruptcy, Chapter 13