A Chapter 13 can last three to five years. During that time things happen. Sometimes your car gets into an accident and sustains serious damage. If you owe money on the car, and your confirmed Chapter 13 plan “crams down” the car loan to pay only the value of the car, what can you do?
Some bankruptcy courts may allow you to modify your plan to surrender the car. Most, however, such as the Northern District of New York, do not allow you to modify a crammed down car loan after confirmation.
Without being able to modify the plan to surrender the car, the bank will want to get the insurance check and continue to receive the monthly payments from the Trustee, to the extent they are still owed a balance on their claim. And you have no car. But you need a car, and if you give the bank the check, you won’t have enough money to either fix the car, or purchase a different car.
Sometimes we can get the bank to agree to allow you to use the insurance check to either fix your car or to buy a new one. If you get a new car, the bank will get a replacement lien on the new car, to protect their interests, and they will still get their payments from the Chapter 13 Trustee. If the bank will not agree to this, your attorney can make a motion to the Bankruptcy Court to order the bank to accept the replacement lien.
Another option is to let the bank get the insurance check, and have them amend their proof of claim in the Chapter 13. Then you can propose to modify the plan to lower payments to the Trustee, and use the difference to finance the purchase of a different car. Of course you will have to get the Court to agree to allow you to borrow the money to purchase the new car.