Lien Stripping an Auto Loan in Chapter 13

Chapter 13 of the Bankruptcy Code contains many useful provisions that are not available to Chapter 7 debtors. One of the most useful is the ability to cram-down an over-secured auto loan to the actual market value of the vehicle, and pay the auto loan over the duration of the Chapter 13 bankruptcy plan.

The Bankruptcy Code recognizes that a lien is only secured to the extent of the value of the property. If the amount of the lien is more than the value of the property, the debt is separated into two parts: secured and unsecured. During a Chapter 13, the amount of the loan that exceeds the value of the vehicle can be stripped away.

For instance, if your vehicle is worth $10,000, but the secured auto loan balance is $13,000, the bankruptcy will separate the auto loan into a secured debt of $10,000 and an unsecured debt of $3,000. The secured portion must be paid in full during the Chapter 13 case, and the unsecured $3,000 amount will be paid along with other unsecured creditors (usually pennies on the dollar, if anything).

Another potential benefit to the Chapter 13 debtor is that the contract terms can be modified during the Chapter 13 repayment period. In some cases the repayment period can be lengthened or contract interest rate can be lowered by the bankruptcy court. Changing the contractual terms can make a significant difference in the ability of the debtor to repay the debt.

If you are struggling with debts you cannot pay and own a vehicle that is worth less than you owe, you may be eligible to reduce your principle and your monthly payment on your vehicle loan. Speak with an experienced bankruptcy attorney and discuss how a Chapter 13 bankruptcy can help you reduce your debt and make your finances work for you and your family.

Buying A Car During Bankruptcy

There are a surprising number of options for a debtor to retain possession of a vehicle during bankruptcy. Choosing the best option depends on several factors including your ability to pay and the condition of your vehicle. In some cases the best financial option is to surrender your vehicle back to the bank and purchase a different one.

Years ago it was unheard of for a debtor in an active bankruptcy to obtain an auto loan. Several years ago two companies, 722 Redemption Funding, and Fresh Start Loan Corporation, began making auto loans to debtors in bankruptcy, and now many banks have lending programs for debtors. The attitude towards bankruptcy has changed and many debtors are evaluated more on their future ability to pay the loan rather than their past financial trouble.

Obtaining an auto loan during bankruptcy is a matter of showing stable income, a good debt-to-income ratio, and some assurance that your current financial trouble is unusual and not likely to reoccur. All lenders require a loan application and the criteria for approval can vary significantly. Some lenders will not approve a loan if you have had a prior repossession. Other lenders want a substantial down payment. New auto loans often want the bankruptcy discharged before approving the loan. In all cases your vehicle choice will be restricted to a newer vehicle with low miles.

During a Chapter 7 bankruptcy the debtor and the lender are free to negotiate terms outside of the bankruptcy case. The loan is not a part of the case and is not affected by the bankruptcy discharge. For Chapter 13 debtors, any new indebtedness must be approved by the trustee and the court. In most cases the Chapter 13 debtor can obtain approval after a showing of need and ability to pay.

If you are considering bankruptcy and need to buy a different vehicle, consult with an experienced attorney. There are many different options during bankruptcy for retaining, refinancing, or purchasing a different vehicle. Call today and get the information you need to drive your financial future.