When a Chapter 13 Bankruptcy case is filed all creditors must stop any and all debt collection efforts. Debtor collection efforts include attempts by a lender to repossess a car. So if a debtor is behind on car payments and the lender is trying to repossess the vehicle, such efforts must stop once the Chapter 13 case is filed. Once the Chapter 13 case is filed, a debtor has have several options regarding her vehicle loan.
First, a debtor may surrender the vehicle to the lender. Any deficiency on the vehicle loan would be treated like other general unsecured creditors. It may be paid nothing, pennies on the dollar, or in full depending on the debtor’s budget and the property she owns. Any amount of the deficiency not paid is wiped out upon completion of the Chapter 13 plan payments.
Second, a debtor may retain the vehicle by paying the full balance of the loan with interest over three to five years through the Chapter 13 Trustee. So a debtor may retain the vehicle even though the loan payments were delinquent when the case was filed. A debtor can also “cram down” the interest rate paid on the loan balance. Instead of paying a high contract rate of interest, a debtor may pay the prime rate plus 1 to 3%. The current prime rate is 5.0%. So a debtor could reduce the interest rate to 6.0 to 8.0%.
Third, a debtor may retain the vehicle by paying only the value of the vehicle with interest over three to five years through the Chapter 13 Trustee. The option is available only if the debtor has had the vehicle loan for more than 910 days prior to filing the Chapter 13 case. So this option is very desirable when a debtor’s vehicle is worth a lot less than the loan balance. For instance, if a debtor’s vehicle is only worth $10,000 but she owes $20,000 on the loan, then this option allows her to pay $10,000 plus interest to the creditor over the course of 3 to five years (through the Chapter 13 Trustee). Again, a debtor can cram down the interest rate. So here a debtor pays only the value of the vehicle and reduces the rate of interest to prime plus 1 to 3%.
Brent M. Myer
Attorney at Law