Chapter 13 buys you much more time than Chapter 7. Prevent repossession, then have greater power and flexibility dealing with the vehicle loan.
We’re in a series on the smart timing of your bankruptcy case. Last week we interrupted for a breaking story on the pandemic-based extension on not paying federal student loans. Two weeks ago we showed you ways that a well-timed Chapter 7 “straight bankruptcy” buys time with a vehicle loan. Today we get into how a Chapter 13 “adjustment of debts” case gives you much more time and flexibility.
Start by Stopping a Pending Repossession
With both Chapter 7 and Chapter 13, one aspect of the timing is that same. They both give you the “automatic stay,” the power to immediately prevent repossession of your vehicle. The automatic stay goes into effect the instant that you and your bankruptcy lawyer file your case. It stops virtually all collection activity by creditors. This includes vehicle repossessions.
The law says that a bankruptcy filing itself “operates as a stay” of various kinds of creditor collections. (See Section 362 of the U.S. Bankruptcy Code on the Automatic stay.) A “stay” is an immediate legal prohibition or stopping of the action at issue. The two kinds of stayed acts pertinent here are:
(3) any act to obtain possession of [your] property,” and
(4) any act to… enforce any lien against [your] property.
Bankruptcy Code Section 362(a).
So, the second you file your bankruptcy case, your vehicle loan creditor can’t “obtain possession of”—take—your vehicle. And it can’t “enforce [its] lien”—its right to repossess under your contract. Both make clear that a creditor cannot repossess your vehicle one you file bankruptcy.
Chapter 7 and 13 are the same in this respect. They both prevent repossession. They both buy you time in that respect. But these two options are very different in how much time they buy you AFTER you file your bankruptcy case.
Benefits of Chapter 13 with Vehicle Loans
Chapter 13 is often better than Chapter 7 regarding your vehicle loan for the following reasons:
- You’re more likely to get back your vehicle even after repossession.
- You’ll have lots of time to catch up on back payments on your vehicle loan, or not need to pay those at all.
- Likely able to lower vehicle payments, interest, and total amount to pay—through cramdown
- Gives you the option often to surrender vehicle, now or later
1. Return of Vehicle AFTER Repossession
You should definitely aim to file your bankruptcy case before a repossession. But if your vehicle just got repossessed, you might be able to get it back if you act fast enough. This is much more likely under Chapter 13 than Chapter 7.
Under Chapter 7 you’d need to have a lot of amount of money immediately available. You’d have to bring the account fully current—pay all the back payments and late fees. Plus you’d have to pay all the repossession costs, which are likely several hundred dollars. If your insurance has lapsed, you’d have to pay to reinstate it. Plus pay for any insurance that the creditor paid on your behalf.
If you had that kind of money you probably would have paid it to the creditor and prevented the repossession. After the repossession the amount needed is significantly more because of the repo costs.
But even you were somehow able to gather that money now, it may still not matter. It may still refuse to return your vehicle. Your vehicle creditor may no longer want to work with you. Whether it must take your money and return your vehicle depends on how your local bankruptcy court interprets the law.
Chapter 13 Solves These Chapter 7 Problems
Filing Chapter 13 is much more likely to get your repossessed vehicle back for two reasons.
First, you’d very likely need to pay less money to your vehicle creditor to get back your vehicle.
Second, you have much more power over your creditor to make it give it back.
Pay Less Money Before the Return
First, you’d very likely need to pay less to the creditor to get back your vehicle. That’s because you’d likely not need to catch up on any missed payments before getting it back. Under Chapter 13 one of two things will happen, depending on your vehicle loan. You’ll either not need to catch up on the missed payments. Or you’ll have of time to do so.
If you qualify for “cramdown” you won’t have to catch up at all. We covered this in a recent (November 9, 2020) blog post. But basically you don’t need to catch up because you effectively get new payment terms going forward. You don’t have to pay the missed ones.
If you don’t qualify for “cramdown,” you’ll likely have to pay those missed payments. But you’ll have lots of time to do so. Chapter 13 provides a legal mechanism for you to catch up on the missed payments through a settle-all-your-debts payment plan. Usually, you have many months, even years, to catch up. This is in contrast to having to do so in a matter of a month or two in a Chapter 7 case.
Note that under Chapter 13 you will still likely have to pay the repossession costs up front. (This is a big reason for preventing the repossession from happening at all by filing bankruptcy beforehand.) Plus you’ll have to be current or get current on insurance. The bankruptcy courts tends to strongly believe that if you can’t pay the insurance to protect the creditor’s interest in the vehicle, as you are contractually required to do, then you can’t keep that vehicle.
Power Over Your Vehicle Creditor
Second, under Chapter 13 your vehicle creditor is more likely forced to return your vehicle. The bankruptcy court has power to require its return. Assuming you have insurance or can reinstate it quickly, your bankruptcy lawyer can file a motion for the vehicle’s return. Or on threat of such a motion, your lawyer contacts the creditor or its own lawyer and arranges for the return. How much you’d have to pay up front depend on your situation. It can depend on when you bought your vehicle, and on whether you owe more than it’s worth. But generally if you do what the law requires of you, your creditor has to return your car.
We just covered the first of 4 reasons why Chapter 13 is better than Chapter 7 for your vehicle loan. We’ll cover the others next week.