What if you really need to hang on to your car or truck, but can’t afford the monthly payments? Or what if you’ve fallen behind payments and just can’t catch up?
“Straight bankruptcy”—Chapter 7—won’t help you here. Most of the time, you have to quickly repay your payments or you will lose the vehicle. Very few vehicle lenders will negotiate the payment amount in a Chapter 7 case.
But if you meet two conditions, you may have the option to keep your car or truck, not need to make up any missed payments, and also lower your monthly payments. This even reduces the total amount you must pay before the vehicle is yours.
The two conditions you must meet:
1. You received your vehicle loan at least two and a half years ago
2. You owe more on the vehicle than what it’s worth
If you meet these conditions, through a Chapter 13 vehicle loan “cram-down,” we can re-write the terms of your vehicle loan. First, we can reduce the balance down to the fair market value of the vehicle. This can sometimes deduct thousands of dollars off the balance. This will not only reduce the monthly payment but may also stretch out the term of the loan. If so, that would lower the monthly payment even more.
Here’s an example: You are 4 years into a 6-year vehicle loan (meeting the 2-and-a-half-year condition), with a balance of $11,000 but the vehicle is worth only $7,000 (meeting the owe-more-than-it’s-worth condition). Further, the regular monthly payments were $498, with 24 months to go. Under a cram-down rewriting of the loan through a 3-year Chapter 13 Plan, the balance to be repaid would be reduced to $7,000, and the term stretched to 36 months. So now the monthly payments are reduced to about $220, which is less than half of the $498 regular monthly payment. Even though this will take three years to pay off instead of two, you’re saving close to $4,000. Plus we’re reducing the monthly payment to something much more affordable.
The difference in the balance on your vehicle loan contract and the reduced amount you would pay through your Chapter 13 plan will be treated as unsecured debt. It would be lumped in with the rest of your unsecured debts, and would be paid through your plan at whatever percentage your unsecured creditors are being paid. This can be a very low percentage and sometimes may even be nothing. This is usually determined by how much your budget says you can afford after living expenses.
So if your vehicle loan meets the two conditions above, you will likely be able to reduce both your monthly payment and the total amount needed to pay off your vehicle without having to resolve any previously missed payments. And you lose the risk of repossession as long as you fulfill the terms of your Chapter 13 Plan.