Depending on the value of your vehicle, when you purchased it, whether you have a car loan, and whether you are current on the loan, you may be able to keep the vehicle whether you file under Chapter 7 or Chapter 13.
Chapter 7
Under Chapter 7, if you have do not have a loan on the car and the value of the car does not exceed the exemption amount for a vehicle, you are entitled to keep it. If you do not have a loan on the car and its value exceeds the exemption amount, the trustee may sell the vehicle, pay your exemption amount to you, and use the remainder to pay creditors. The vehicle value that can be exempted in a Chapter 7 bankruptcy varies from state to state.
If you have a loan secured by the car, there are other options. In Chapter 7, if you are current on your payments and your equity in the car does not exceed the exempt amount, you may be able to enter into a voluntary reaffirmation agreement with the lender, in which you agree to keep the car and pay the balance owed and the creditor agrees not to repossess the car so long as you continue to make the payments. A reaffirmed debt is not discharged and the reaffirmed debt as well as the creditor’s security interest survive the bankruptcy. If you fail to make payments after the debt is reaffirmed, the lender can repossess the car and you will be responsible for any deficiency balance, just as though you had not filed the bankruptcy.
Under Chapter 7, if you have a loan secured by the car and your equity in the car exceeds the exempt amount, the trustee may sell the vehicle, pay the secured creditor, pay the amount of the vehicle exemption to you, and use the balance to pay other creditors. If you have no equity in the car because the balance of your loan exceeds the value of the car, you may have the option under Chapter 7 to redeem the vehicle. To redeem the vehicle, you pay the secured creditor the value of the car in a lump sum by taking out a new post-bankruptcy loan secured by the car, the balance of the debt is discharged, and you begin to make payments on the new loan. In Chapter 7, if you are behind on your payments and unable to redeem the vehicle with a new loan, you may have to surrender the vehicle.
Chapter 13
When a debtor is behind on car payments, filing under Chapter 13 provides an opportunity to avoid repossession. Chapter 13 allows a debtor to pay off arrearages on a car loan over the course of a three- to five-year plan while continuing to make current payments.
Under Chapter 13, it is also possible for the debtor to keep a vehicle with equity in excess of the exempt amount. In a Chapter 13 case, the debtor selects exemptions just as in Chapter 7, but typically is able to keep all of his or her property whether or not it is exempt. In Chapter 13, a debtor’s exemptions are used to determine whether the plan satisfies the “best interests of creditors” test. Under this test, in order for the plan to be confirmed, the debtor must show that creditors will receive at least as much as they would have received had the case been filed under Chapter 7. If the Chapter 13 plan meets this requirement, along with several others, the debtor may be entitled to keep a vehicle with an equity value in excess of the exempt amount.
Depending on when the car was purchased, another major benefit of Chapter 13 is that when the loan balance exceeds the value of the car, the debtor may be allowed to reduce the amount owed on the car loan. This is called a “cram down” and the result is that over the course of the Chapter 13 plan the secured creditor is paid the value of the car plus interest, but receives a greatly reduced amount for any loan balance in excess of the value of the car, sometimes just a few pennies on the dollar.
In addition, a Chapter 13 debtor is often allowed to reduce the interest rate on a car loan by a significant amount. A combination of cramming down and reducing the interest rate can make it possible for a debtor to keep a vehicle under Chapter 13 that would have to be surrendered under Chapter 7.
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