For most people in Northeast Ohio, a car is not a luxury. It is how you get to work, take the kids to school and make it to the doctor. So when you start thinking about bankruptcy, one of the first questions is usually the simplest: will I lose my car?
If you file Chapter 13, the answer for many people is no. Chapter 13 is built to help you keep property while you pay what you can over time. Here is how it works with a car, in plain terms.
How Chapter 13 protects your car
In Chapter 13, you keep your property and make one monthly payment to a court-appointed trustee for three to five years. The trustee pays your creditors from that money under a plan the court approves.
Unlike Chapter 7, nothing is sold to pay creditors. As long as you keep up with your plan, your car stays with you. Your plan simply has to account for the car loan and pay unsecured creditors at least what they would have received if your property had been sold in a Chapter 7.
Behind on payments? You can catch up over time
Many people come to us because they have missed a few car payments and are afraid the lender is about to take the car. This is where Chapter 13 can really help.
The moment you file, the automatic stay goes into effect. That is a court order that stops most collection activity, including repossession. Your lender has to stop and work within the bankruptcy process.
From there, the missed payments can usually be paid back through your plan, spread out over the life of the case, instead of all at once. If your car was repossessed very recently and has not been sold yet, filing quickly may make it possible to get it back. Time matters a great deal here, so call an attorney right away if your car has just been taken.
You may be able to lower what you owe on the car
If you owe more on your car than it is worth, Chapter 13 may offer something called a “cramdown.” In some cases, your plan can reduce the loan balance to the car’s actual value. The rest of the loan is treated like other unsecured debt, such as credit cards, which often get paid only a portion.
There is an important limit. For a car bought for personal use, a cramdown is generally only available if you bought it more than about two and a half years before filing. Newer loans usually have to be paid in full through the plan, although the interest rate and the monthly amount can sometimes still be adjusted.
Whether a cramdown fits your situation depends on when you bought the car, what it is worth and what you owe. This is one of the things we look at closely in a consultation.
What if your car is paid off?
If you own your car outright, Ohio law lets you protect a set amount of equity in a vehicle. Other exemptions may also help cover a car’s value. You can read more on our bankruptcy exemptions page.
In Chapter 13, you keep the car even if its value is higher than what you can protect. The unprotected equity just has to be accounted for in what your plan pays to unsecured creditors.
What you need to keep doing
Keeping your car in Chapter 13 comes with a few responsibilities:
- Make your plan payments on time, every month.
- Keep full insurance on the car if there is a loan on it. Lenders watch this closely.
- Talk to your attorney before buying, selling or trading in a vehicle during your case. You usually need approval first.
- Let your attorney know right away if your income drops or the car is damaged or stops running.
Life does not stand still for five years. If something changes, there are often ways to adjust a plan. The key is to speak up early rather than fall behind.
What to do now
- Find your car loan statement and note the balance, monthly payment and how many payments you have missed.
- Look up when you bought the car and get a rough idea of what it is worth today.
- Do not hide the car or stop insuring it. That can make things harder.
- If a repossession is threatened or has just happened, call an attorney today.
Not sure whether Chapter 13 is right for you? Our Bankruptcy 101 page explains the basics of each chapter.
Lake Legal Services helps people in Stark, Summit, Wayne, Tuscarawas, Carroll, Columbiana, Portage and Mahoning counties keep the things they need while getting out from under debt. We will look at your car loan, your budget and your goals, and explain your options clearly. Call 330-605-3508 or book a free consultation to talk it through.
This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Every situation is different; consult an attorney about your specific circumstances.