When you struggle financially, you become incapable of paying your financial obligations. A bankrupt individual who is unable to pay back any outstanding debts to creditors may choose to file bankruptcy as the last resort to solve debt problems. Bankruptcy can help you pursue debt settlement, restructure your finances, and rebuild your credit score.
Bankruptcy filings are generally regulated by federal law; however, bankruptcy laws may vary from state to state. It is important to consult a competent Schaumburg bankruptcy attorney to know the bankruptcy rules that apply in the state where you reside.
Before you declare bankruptcy, you must know how to choose the most appropriate bankruptcy type that will solve your financial problems. Chapter 7 and Chapter 13 are the two common types of bankruptcy. The bankruptcy process involves submitting detailed paperwork, passing the “means test”, and taking credit counseling sessions.
Filing bankruptcy gives you a chance to be relieved of some of your debts through a bankruptcy discharge. It is a permanent bankruptcy court order that frees a debtor from personal liability for specific types of debts. Declaring bankruptcy does not require you to give up everything that you own; however, not all your assets can be fully protected from liquidation.
The article will help you answer the following questions:
- What are the Pros and Cons of Filing Chapter 13?
- How Can Chapter 13 Bankruptcy Help You Keep Your Car?
- What Must Be Done to Save Your Car?
What are the Pros and Cons of Filing Chapter 13?
Bankruptcy Chapter 13 gives you a chance to repay your creditors through the help of a payment plan. It can also allow you to keep your car or vehicle. This chapter allows you to catch up on your overdue car loan debts. If your vehicle loan amount is greater than the worth of your vehicle, then you can reduce the amount that you owe.
Sometimes, it is not advisable to save a car in bankruptcy Chapter 13 due to the following reasons:
- You will not be able to keep or save it if your car loan debts are exceptionally high.
- You are unnecessarily making payments for a second car that you do not need.
- You have a lot of non-exempt car equity (equity that is not protected by a bankruptcy exemption).
How Can Chapter 13 Bankruptcy Help You Keep Your Car?
A Chapter 13 bankruptcy provides the following benefits that can help you keep your property most especially your car or any vehicle:
- Avoid repossession
- Surrender your vehicle
- Catch up on missed payments
- Possibility to reduce the car loan amount
Avoid repossession
Chapter 13 bankruptcy does not allow creditors or collection agencies to collect money or assets from you in compliance with an order known as “automatic stay”. Once you have filed this chapter, a lender cannot repossess your vehicle.
Surrender your vehicle
If you believe that you cannot afford to pay your car loan anymore, then you can return it to the car lender or bank. Surrendering your vehicle will relieve you from your car loan payment obligations. In most cases, you pay off your car loan through your repayment plan. You make a monthly plan payment to the bankruptcy trustee and he or she sends a portion of that payment to your car lender.
Catch up on missed payments
You can still keep your car even if you are behind on your auto loan due dates as long as you can pay the arrearage through a restructured repayment plan and make monthly payments for your car regularly. If you stay current on your auto loan and repayment plan, then your car will not be repossessed by the lender.
Possibility to reduce the car loan amount
The value of cars depreciates quickly over time; therefore, if your auto loan amount is higher than the vehicle value, you can reduce or “cram down” your loan amount when you file for bankruptcy Chapter 13. The amount that you owe can be reduced to equal to the worth of the vehicle and the remaining amount will become unsecured debts. If this is the case when you enter bankruptcy, you may be able to renegotiate your auto loan contract and have the lender agree to accept the market value of the vehicle rather than your loan balance.
What Must Be Done to Save Your Car?
Chapter 13 bankruptcy generally allows you to keep your assets and properties, however, it depends on the circumstance. You must prove that you are financially capable to pay the required amount that your creditors should receive in the reorganized repayment plan. It might be costly especially if you want to keep several properties and assets which are not protected by bankruptcy exemptions. A credible Schaumburg bankruptcy attorney can explain which of your assets can be saved.
Furthermore, aside from paying your monthly living expenses (car and house payment) and your unsecured debts (medical bills, unpaid utility bills, and credit card balances) within the three up to five years repayment plan, you might have to pay more of your disposable income every month (money left after paying the necessary bills) or the total value of all non-exempt property unprotected by a bankruptcy exemption.
Payment for Excessive Motor Vehicle Equity
Bankruptcy allows you to “exempt” or keep a certain value or amount of assets and properties. You need to pay the total value of the non-exempt property that you can keep. If the amount that you will pay to your unsecured creditor is equal to the non-exempt property, then having a lot of non-exempt equity in your vehicle will be an inconvenience.
For example, assume that your state exemptions have allowed you to keep vehicle equity worth $5,000. If you have vehicle equity worth $15,000, you will be required to pay $10,000 through the bankruptcy plan. Moreover, if there is a significant value or amount of non-exempt property equity, you might not be financially capable to pay the required plan payment under Chapter 13.
Car Expenses Must Be Reasonable
Your repayment plan under Chapter 13 bankruptcy should indicate that your disposable monthly income (your income minus essential living expenses) is used to pay off your unsecured debts. In this chapter, you are obliged to allot your disposable income to the lenders within a period of three to five years. Creditors monitor the way you handle your finances. They would not want you to use your funds to pay unnecessary expenses such as a high car loan amount for a second vehicle that you do not need.
Importance of Having a Bankruptcy Lawyer
In a bankruptcy filing, it is important to choose the right bankruptcy chapter that will help you settle your debts and have a fresh start. It is advisable to seek legal advice from our experienced Schaumburg bankruptcy lawyers at Cutler Bankruptcy. We will help you understand the options that you have to save and keep your car amidst bankruptcy.