My car payments are past due.

Car Lenders Are Quick To Repossess. How Bankruptcy Can Save Your Car and Eliminate Your Debt

How Bankruptcy Can Save Your Car

You can stop the repossession of your car by filing for either Chapter 7 or Chapter 13 bankruptcy protection. Once your case is filed, the "automatic stay," arises and is essentially a restraining order issued by the bankruptcy court which prevents your car creditor from repossessing your car regardless of how much you owe or are past due. But there are big differences in what you can accomplish with a Chapter 7 or a Chapter 13.

Chapter 7 and Your Vehicle

Immediately upon filing your Chapter 7 case, the creditor cannot repossess your vehicle. But, there are two issues: (1) personal liability, and (2) collateral. Chapter 7 will eliminate your personal liability, which means you don't owe on the debt, but the car creditor has a right to the collateral, in this case, the car, if you don't pay for it. So, during the case, you will need to reaffirm the debt, which means placing yourself back into a liability; redeem the vehicle, which means to pay fair market value for the vehicle, or surrender the vehicle and just get out of debt.

The biggest issue is if you want to keep your car and you are past due. Chapter 7 isn't the best option for you because you will have to "catch up" with the payments in a short time period or you will have to redeem the debt by paying fair market value. Also, you don't get to make payments on the fair market value; you've got to come up with cash to pay it in a lump sum. Sometimes car creditors may negotiate a good deal for you, but more often than not, they want you to catch up completely and immediately.

Chapter 13 and Your Vehicle

Immediately upon filing your Chapter 13 case, the creditor cannot repossess your car. Chapter 13 is a good place to be when you're past due on a car loan. If the car was purchased over 2 ½ years before you filed your case, you can "cram" down the loan amount. What that means is you can pay fair market value rather than what you owe. So for example, if you owe $20,000.00 and the car is only worth $10,000.00, you can pay the $10,000.00 to keep the car. This means you can pay $10,000.00 over a 3-5 year Chapter 13 plan, and not the $20,000.00. Plus, you can lower the payments and the interest rate. Even better, you don't have to catch up on payments. Chapter 13 allows you to start fresh with a payment plan. If your car was financed within the last 2 ½ years, then you will have to pay the balance, but you won't have to catch up, and we will restructure the car loan over 3-5 years at an interest rate that's under 5%.

"My car has already been repossessed"

Although a Chapter 7 case will stop the continuing sale of your vehicle, you will have to negotiate with the creditor and possibly have only the redemption option available to you (again paying fair market value). Chapter 13 is the best place to be as the Creditor will have to return the vehicle and then you can change the terms of the loan, restructure the loan over 3-5 years, and set a very low-interest rate.

"I can't catch up and I don't want the vehicle"

This situation is perfect for a Chapter 7 case. Your personal liability goes away and you return the car when you're ready during the Chapter 7 process. Generally, the car creditor will sell your car for less than what's owed and sue you for the balance. But since Chapter 7 eliminates your personal liability, your entire obligation to repay is wiped out!

If you are struggling with your car debt, feel free to contact my office to discuss whether filing for bankruptcy protection is the right option for you. Call the Denton Law Group today at (619) 458-3739 to schedule a free consultation.

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