Can I Lower My Car Payment in Bankruptcy?

15 Apr Can I Lower My Car Payment in Bankruptcy?

If you’re having trouble paying your monthly bills—especially that steep car loan— you might be wondering if filing for bankruptcy will lower your existing car payment. It depends on which type of bankruptcy you file, but bankruptcy could potentially lower your car payment.

Here are basic descriptions of the two types of bankruptcy that you can file:

A Chapter 7 bankruptcy, or “liquidation” bankruptcy, will discharge most of your unsecured debt. A trustee will attempt to sell any significant property to pay your creditors.

A Chapter 13 bankruptcy, or “wage earners” bankruptcy, will reorganize your debts so that you can repay some or all of your debt over a set period of time.

When you file for Chapter 7, your car loan will not be discharged because it is not an unsecured debt, but rather a secured debt. In this type of bankruptcy filing, your secured creditors—which include the holders of your car loan— will have you sign a reaffirmation agreement. This is an agreement between the creditor and the debtor that waives the discharge of debt in a pending bankruptcy proceeding. You must sign this agreement in order to retain your vehicle. You will be required to maintain your monthly payments. If you default, the creditor has the right to repossess your car.

There is one possibility through Chapter 7 that could decrease what you owe on your car, and that is you may take advantage of your right to redeem your car. When you redeem your vehicle, you pay an amount equal to its replacement value. This is often much lower than the amount that remains on your loan. The hitch is that you will need to pay this figure in a lump sum, and few people filing for bankruptcy have the cash to do so.

Your best chance of reducing your car payment is through Chapter 13 bankruptcy. In Chapter 13, your car loan will become part of your bankruptcy plan which will be paid by your trustee. Your car payment could remain the same, but you can reduce a high interest rate (typically down to ~4%), and you can even reduce the principal balance of a car loan if (a) the value of the vehicle is less than the balance owed and (b) the vehicle was purchased at least 910 days prior to filing your Chapter 13. This is known as a “cram down.” In a cram down, if the balance of your loan is more than your car is worth, then you can pay back the balance based on the current value rather than the contracted loan balance. This could decrease the amount you owe considerably and thereby lower your payment.

There are some variables to consider, but filing for bankruptcy often a good option if you’re in need of lowering your monthly car payment.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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