Chapter 7 and Chapter 13--Vehicle Loans

 Posted on October 02, 2015 in Vehicle Loans

Two similar scenarios, two very different solutions for keeping a vehicle if you’re behind on payments.

Two blog posts ago the topic was about how Chapter 7 and 13 can help you keep collateral—including a vehicle on a vehicle loan. Now, after giving a quick summary, we’ll show how the law works through two scenarios, one today under Chapter 7 and another in the next blog post under Chapter 13. Through these two scenarios you’ll see in a practical way how you might choose between these two bankruptcy options if you’re behind on a vehicle loan.

A Quick Summary

If you are not current on your vehicle loan and want to keep it, both a Chapter 7 and Chapter 13 filing would immediately stop any pending repossession. After that:

• With a Chapter 7 “straight bankruptcy” you would very likely need to get current on the loan quite quickly—within about 30 to 60 days—or there’s a good chance your lender won’t let you keep the vehicle. You will very likely also need to “reaffirm” the debt—continue to be legally liable on it, excluding it from the “discharge”—the legal write-off—of all or most of your other debts. That’s true even if the vehicle is worth less than the debt amount, leaving you exposed to a potentially large debt if you are not able to pay the loan in the future. There are some exceptions to these tendencies, particularly with some local vehicle lenders, but in most situations you would have to catch up quickly and be willing to accept the conditions just stated.

• With a Chapter 13 “adjustment of debts” you would have to accept a much lengthier process—lasting 3 to 5 years usually—but doing so can give you many advantages. You would have many months, even a couple years, to catch up on missed vehicle loan payments. If the loan is more than 2 and a half years old and the vehicle is worth less than its debt you can do a “cramdown.” This means that you would never have to catch up on any missed payments, would likely be able to reduce the loan’s interest rate and monthly payment, and usually reduce the total amount you pay on the loan, sometimes by thousands of dollars. At the end of the case the lender would be required to release its lien and the vehicle would be yours free and clear.

Scenario #1

Derrick owns a 2009 Ford F-150 STX pickup that he bought used 20 months ago. He owes $11,000 on it, with monthly payments of $389. It’s in decent condition, worth about $9,000. He absolutely needs it to get to work.

He’s two months behind because he got injured on his construction job a year ago, was out of work for 8 months, and his workers’ compensation benefits paid a lot less than his regular pay. Now Derrick’s been back at work for two months but is still way behind on his credit cards, a bunch of medical bills, and all of his other debt payments, partly because he first had to catch up on the rent on his home and his child support.

Derrick has never before had any money problems but now because of how much he owes he’s decided to file bankruptcy, and is trying to pick between a Chapter 7 or a Chapter 13 case.

Although he makes decent money when he’s working full time, Derrick qualifies for Chapter 7 under the “means test” because his income was relatively low during the 6-month look-back period as a result of getting only workers’ comp during much of it. Plus he has no other reason to go through the much lengthier Chapter 13 procedure—no large unpaid income taxes nor any more back child support owed, and no home mortgage arrearage to catch up on, for example.

Derrick’s biggest challenge about filing a Chapter 7 case is catching up on his pickup loan. His attorney informed him that his vehicle lender would not cut him any slack, so he’d have to catch up very quickly on the two $389 payments he was late on. And he’d have to “reaffirm” the debt and remain liable on the full amount even though he owes about $2,000 more than the pickup is worth.

But Derrick was confident that he could catch up because the busiest half of the work year was just starting, and his employer had more building projects under construction than it had workers to man them. By working consistently full time, and even without counting some likely overtime, Derrick calculated that he could pull together the needed 2 times $389, or $778, in about 6 weeks after the filing of his Chapter 7 case.

He could do this on top of paying the upcoming regular monthly pickup payments on time because he didn’t have to pay any of his other creditors, and didn’t have to worry about them suing him or trying to garnish his paychecks or his checking account.

But just in case he wasn’t going to be able to get the work hours he expected, Derrick got his favorite uncle to agree to pay the $778 if necessary.

Derrick knew that he was accepting some risk in “reaffirming,” in agreeing to be liable on his truck loan even though on paper his rig was worth $2,000 less than he owed. But he believed that he’d gotten to know his F-150, and to him it was worth at least what he owed on it. With all of his other debts gone, he had good reason to believe that he could afford the monthly payments throughout the rest of the life of the loan. He also knew that he was getting a jump on improving his credit record as he made the timely payments and paid off the vehicle loan.

So Derrick sensibly decides that Chapter 7 is the right legal solution for him.

In our next blog post we’ll tell you about Derrick’s twin sister, Danielle, and how just a few differences in her scenario led her to a different solution.