A major advantage of Chapter 13 bankruptcy is that the debtor can keep his/her real property; including his/her car, van, truck, motorcycle, or other vehicle. Moreover, there are some other Chapter 13 features that come helpful with respec to a debtor’s vehicle. They are:
• If the debtor is behind on his/her car loan payments, s/he can make up the arrears through Chapter 13 repayment plan, and
• If the debtor is inverted on his/her car loan, and meets certain time restrictions; s/he may be able to shrink his/her car loan to the value of the car through a cramdown process.
In certain circumstances, if the creditors repossessed the debtor’s car and are planning for its sale, the debtor can stop such repossession or sale through Chapter 13 bankruptcy proceedings.
A Chapter 13 Trustee does not have the right to dispose the debtor’s property and settle the creditors’ claims. If a debtor files for Chapter 13 bankruptcy, s/he proposes a plan to pay back some or all of the debts over a three to five year period. Generally, the bankruptcy court discharges or cancels a debtor’s personal liability on a car loan. However, the creditor can hold a lien on that vehicle until the settlement of debt. If the debtor fails in his repayment plan, the creditor can exercise the right to repossess the car. In most cases, the debtor will make monthly plan payments to the bankruptcy trustee and s/he will remit a portion of it to the vehicle creditor. In some states, the bankruptcy courts will exclude the car from repayment plan and allow the debtor to make regular payments outside of bankruptcy.
In Chapter 13 bankruptcy, the creditor cannot repossess the car due to the automatic stay. In such conditions, the creditor has to file proof of claim regarding the debtor’s arrearage and balance of debt. If the debtor fails to challenge the creditor’s claim or cramdown the loan, s/he would be liable to settle the whole balance debt along with the arrears through the repayment plan.
In certain circumstances, Chapter 13 bankruptcy permits the debtor to a cramdown procedure for reducing the principal balance of the car to its fair market value. A car loan cramdown also allows a reduction in the interest rate on debt. In a cramdown procedure, the debtor settles the debt equal to the market value of the vehicle through the repayment plan. The remaining loan balance will be turned to be a part of unsecured loan and closed down at the end of the repayment plan.