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Bankruptcy and Credit Unions: Part 4 – Your Options in a Chapter 13

By Peter Orville, Attorney at Law on Oct 16, 2007 in Bankruptcy Practice and Procedure, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy, General Bankruptcy Information, Protecting Assets In Bankruptcy

In a Chapter 13, the options on how you can treat debts to a credit union are more flexible than in a Chapter 7. If the value of the vehicle is less than what is owed against it, and the loan is over 910 days (2 ½ years) old, the car can be “crammed down”.

A “cram down” is where you pay the credit union the value of the car, not what is owed on the loan. If you have additional cross-collateralized unsecured debts to the credit union, they will be treated as unsecured in the Chapter 13 plan and will be paid the same percentage the plan calls for all unsecured debts to be paid.

(Some Bankruptcy Courts have ruled that even if the car was purchased in the last 910 days, it can still be crammed down if there was a trade-in leaving negative equity).

If the value of the vehicle is more than what is owed on the car loan, the balance due can be paid through the chapter 13 plan. In this case, the Chapter 13 trustee will pay the credit union the remaining balance on your vehicle loan and you will not be responsible for any further payments. If you have other cross-collateralized debts to the credit union, you may not be able to pay only the balance due on the car loan, and may have to pay the car’s value.

Another option for treating a credit union car loan in a Chapter 13 is to continue paying the regular loan payment directly to the credit union. This can be done if the car loan was within the 910 days prior to the filing of the Chapter 13, or when the value is more than the balance due.

Of course if the value is less than the balance due and it is not a “910” car loan, the Chapter 13 trustee may object to it being paid outside the plan because it would adversely affect the unsecured creditors. (Some Chapter 13 trustees require that all secured payments, including mortgages, be paid through the Chapter 13 plan).

Finally, just as in a Chapter 7, you have the option to surrender the vehicle to the credit union. After they sell the car, any remaining deficiency and any cross-collateralized debts will be paid by the Chapter 13 trustee as unsecured debts.