If a borrower is behind on their car payments and in danger of having their vehicle repossessed, they may opt for Chapter 13 bankruptcy (BK). In this type of filing, a person's debts are reorganized. The borrower then agrees to pay a percentage of what they owe over a period of three or five years.
Once a debtor files for Chapter 13 BK, an "automatic stay" goes into effect. This means that the lender is not permitted to repossess the vehicle in question for a certain amount of time. The automatic stay also makes it possible for some filers to get their car back if it has been recently repossessed.
However, filing for Chapter 13 is a complicated process. There are laws in place to protect lender rights. Before anyone files for bankruptcy in order to avoid a repo, they need to understand how the process works.
Chapter 13 Bankruptcy and Adequate Protection Payments
After a Chapter 13 bankruptcy is filed, it can take a few months for the repayment plan to be approved by the court. During this time, the filer's car (the secured asset) will depreciate in value. In this case, even though the lender may not be allowed to take the vehicle, they still need to be compensated for the loss in value. This is why the filer (in most cases) is ordered to make "adequate protection" payments.
These payments are meant to cover the cost of the car's depreciation during the time leading up to when the repayment period begins. At that time, if the auto loan is included in the repayment plan, that includes back payments (arrearage), the debtor will continue to be protected against repossession. That is, of course, if they don't get behind on their payments.
Adequate protection payments vary according to how quickly the car is losing value and how far along the filer is in the loan. In some cases, these payments can be roughly the same amount as a person's regular car payment. Failure to make adequate protection payments can result in the lender petitioning the court to remove the automatic stay. If this happens, the lender could be allowed to repossess the vehicle.
However, if a debtor can prove to the court that the car is necessary as a means to get them to work, a judge might be willing to work with their situation. In such a case, the adequate protection payments could be reduced or even waived. Of course, the filer would also have to provide proof that they can't afford to make the full payment.
Cramming Down a Car Loan in Chapter 13 Bankruptcy
Most Chapter 13 bankruptcy filers who choose to keep their financed car will pursue a "cram down" arrangement. Here, the lender allows the borrower to pay back the current value of the car instead of the full loan balance.
Many lenders will permit a cram down because it's a cheaper option than repossession. With a repo, the lender would have to accept whatever the vehicle can be sold for at auction. Ordinarily, the debtor would be obligated to pay the difference between the car's selling price and the loan balance. But if the borrower has declared bankruptcy, they will most likely be off the hook for any "loan deficiency."
How a Chapter 13 BK Filer can Reclaim a Repo'd Car
Once a vehicle is repossessed, it can be difficult for a person to reclaim their car. However, if they file for Chapter 13 soon after the repo happens, they might have a chance to get their vehicle back.
Basically, the filer would need to prove to the judge that the car is necessary for their livelihood. If the debtor needs a car in order to earn the income that will allow them to follow through with a repayment plan, then the judge may order that the vehicle be returned.
All overdue payments (arrearage) and future payments must also be included in the Chapter 13 repayment plan. And the same rules apply when it comes to any adequate protection payments due before the repayment period begins.
Buying a Car During and after Chapter 13 Bankruptcy
If you need to finance a car while in Chapter 13 bankruptcy or after, Drivers Lane can help. In addition, if your credit has been damaged in any way, we can assist you with the vehicle buying process.
We can match you with a local dealership that can work with unique credit situations. You may even be able to buy your car with little or no money down. Also, our service is free and comes with no obligations. So, go ahead and fill out our simple and secure auto loan request to get started today.