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A Chapter 13 bankruptcy is a restructuring of your debts. Your debts are organized into a bankruptcy plan to help you regain a solid financial foundation. When you complete your plan payments, most, if not all, of your unsecured debts are discharged.
You can keep your property in a Chapter 13, including your vehicles. If your vehicle has a lien, you must pay the loan to the creditor to keep the car. However, you might qualify to reduce the loan amount and interest rate. In this blog, our Massachusetts bankruptcy attorneys explain ways to keep your car when filing for Chapter 13 bankruptcy.
Does Your Car Have Non-Exempt Equity?
The first thing to determine is whether the equity in your vehicle impacts the amount of your bankruptcy payment. Bankruptcy exemptions protect a specific amount of equity in an asset from being used to pay your creditors. Massachusetts allows debtors to choose between federal and state bankruptcy exemptions, but you must use the same exemptions for all assets.
The federal bankruptcy exemption for a vehicle is $4,450. The Massachusetts bankruptcy exemption for a vehicle is $7,500 ($15,000 for debtors with a disability or 60 years or older). Therefore, the state exemption provides more protection. However, a thorough examination of your other assets is required to determine whether federal or state exemptions are the best choice.
Fair market value minus outstanding liens equals the equity in your vehicle. Therefore, if your car is worth $20,000 and you owe $15,000, you have $5,000 in equity. The state exemption protects all equity in the car. If your car has non-exempt equity, you must pay that amount to your creditors over the plan to keep the vehicle.
Paying a Car Loan Through a Chapter 13 Plan
Filing Chapter 13 stops a repossession. The lender must work through the bankruptcy court to receive their money. You include the loan in your bankruptcy plan, which means you can spread out the loan amount for 60 months, which may reduce the amount of your monthly car payments.
Additionally, your car loan may qualify for a “cramdown.” A “cramdown” allows you to reduce the balance owed on your car. For a “cramdown,” you must meet these requirements:
- You owe more on the car loan than the car is worth
- The vehicle is for personal use
- You purchased the vehicle at least 910 days before filing for bankruptcy
Suppose you owe $20,000 on a car loan, but the vehicle is only worth $11,000. Instead of paying the entire loan amount, you propose to pay $11,000 since that is all the lender would receive if you surrendered the vehicle. The remaining $9,000 becomes an unsecured debt. When you complete your bankruptcy plan, any remaining balance is discharged.
In addition to reducing the secured amount owed on the vehicle, you may also be allowed to reduce the interest rate. Lowering the interest rate also reduces how much you owe on the vehicle.
Learn More During a Free Consultation With Our Massachusetts Bankruptcy Lawyers
A Chapter 13 bankruptcy can help protect your property while eliminating debt. Contact Logan A. Weinkauf, P.C., to schedule a free consultation with an experienced Massachusetts bankruptcy attorney. Let us help you take the first step on the road to financial recovery and well-being.