Can I Give Back My Car in Chapter 13?

25 May Can I Give Back My Car in Chapter 13?

Chapter 13 bankruptcy repayment plans are meant to be flexible. One way to save money is to give up a car you are paying for in order to keep your payment low. But the timing of when you make that decision could be important.

If you just filed a Chapter 13 bankruptcy then you can propose in your plan to give back a car to the lender instead of paying for it. The balance owed after the lender sells it can be treated to be paid the same amounts as your credit cards and other unsecured debt. That could be little or nothing. For many people this is a huge savings, especially if they have reliable transportation already.

It can be trickier, if you decide to make this change after the court has approved a plan to keep the car through your bankruptcy. One important court — the Sixth Circuit covering Kentucky, Michigan, Ohio and Tennessee — ruled in 2000 that the amount of repayment to the car lender can’t be changed after confirmation. You can give the car back in Chapter 13 bankruptcy, but if you still owe $5,000 as a secured claim and they only sell it for $2,000, your plan will still have to cover the difference in full with interest.

The trend has been evolving away from the Sixth Circuit’s approach, however. Most recently the Western District of Missouri concluded that you could give the car back in Chapter 13 bankruptcy and eliminate the secured claim, even if the car doesn’t fetch that much on resale. You have to make such a proposal in good faith — for example you didn’t run the car into the ground or otherwise trash it — and you have to have a change in your finances to justify modifying the bankruptcy plan as well.

This makes sense because ultimately the money going to pay for the car’s secured claim is money that could be shared with all the other creditors. If the payment has to stay higher, two things could happen. One, the consumer will end up converting to Chapter 7 — where the car lender only gets the car back anyway and most other creditors get little or nothing. Or, two, the consumer’s net income goes to pay the car lender who is now an unsecured creditor to the disadvantage of the other unsecured creditors. Neither one of those seems like a good result. And they’re not required by a careful reading of the law.

So if you go into Chapter 13 keeping a car and loan, make sure you keep it insured. Try to maintain it well. (It is your car after all.) But always keep in mind you may have options to modify the plan later on to save more.

Image credit: John Lloyd/Flickr

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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