The two main Chapters of bankruptcy law that consumers use, Chapter 7 and Chapter 13, each have their pros and cons. In a Chapter 7 personal bankruptcy, all or most of your both secured and unsecured consumer debt is eliminated, but you could lose some of your assets, including your car. In Chapter 13, you set up a repayment plan that based on your ability to pay. If you successfully complete the plan, you don’t lose your car.
Sometimes, however, people find they can’t keep up the Chapter 13 repayment plans. For example, if you became sick or lost your job during the Chapter 13 plan period, you might not be able to keep up the payments. In many such cases, you can convert your Chapter 13 bankruptcy into a Chapter 7 bankruptcy.
If you are considering converting your Chapter 13 into a Chapter 7, you may be wondering whether you will be able to keep your car or the other assets you still owe money on. If you convert to Chapter 7, will they repossess your car?
Some lenders may consider your loan in default during a Chapter 13 plan
Whenever you file for bankruptcy, you have the option to reaffirm some of your loans. A “reaffirmation agreement” is a new agreement with the lender that you will pay the loan even though you could have it discharged or reduced in bankruptcy. The court has to approve most reaffirmations, but it is one way that a Chapter 7 bankruptcy filer can keep things like a car that would otherwise be repossessed.
When you convert your Chapter 13 bankruptcy into a Chapter 7, if you want to keep your car you will need a reaffirmation agreement, or some other agreement with your car lender. The problem is that some lenders may not be willing to agree to that.
Depending on the lender, and on whether your car payment through your Chapter 13 plan is lower than your original car payment, your lender may consider you in default on the loan. For example, if you were originally paying $450 per month but, under your Chapter 13 payment plan you are only paying $300, your lender is getting a lot less money in the end, and that may put you in default in the eyes of your lender.
If you successfully complete your Chapter 13 plan, that won’t matter. Your car will be considered paid off after you successfully complete the plan — even if you ended up paying less than the full amount of the loan.
Your car lender has to accept that outcome by law, and can’t take your car. However, it may now consider you a poor credit risk and be unwilling to agree to an affirmation.
That could be an important consideration in whether to convert your existing Chapter 13 bankruptcy to a Chapter 7. Some lenders — notably credit unions — may be willing to work with you, but many will not. You will need to contact your car lender to find out if they consider you to be in default. You or your attorney can also ask them if they would be willing to let you keep the car if you reaffirm the debt.
As with all legal questions, the answer will depend on your own situation. It’s a good idea to get good legal advice before making any decisions that could affect your bankruptcy.
Source: Bankrate.com, “Keep a car and reduce payments in Chapter 7,” Justin Harelik, October 19, 2010