14 Feb What Happens in Bankruptcy when My Vehicle is Worth Less than What I Owe on It
The answer to this question depends on what Chapter of bankruptcy you decide to file under. Also, everything I relate here will assume that you filed your case on or after October 17, 2005.
In Chapter 7, you have four options — you can choose to “redeem” your vehicle; you can choose to “surrender” your vehicle; you can choose to “reaffirm” your vehicle; or, you can choose to “take your chances” by making payments on the vehicle without taking any other legal action while your Chapter 7 case is pending. I will develop these topics in later posts.
In Chapter 13, if you do not wish to retain the vehicle, you may “surrender” it. There are some wrinkles to “surrender” in Chapter 13 which make it slightly different than “surrender” in Chapter 7; this will be the subject of a later post.
In Chapter 13, if you want to retain your vehicle, you cannot alter the principle amount owed on the vehicle if the loan associated with the vehicle is a “purchase money” loan which was originated within approximately 2.5 years (the bankruptcy code states “910 days”) of the filing of the Petition in bankruptcy. The limitation of “910 days” may not apply if it can be shown that the vehicle is primarily used for business purposes or was purchased for someone else’s use. However, under some circumstances and in certain jurisdictions, even if the loan was originated within the 910 day period, your attorney may be able to force the lien holder to accept a modified interest rate pursuant to a Supreme Court case popularly known as “Till“.
On the other hand, if the loan is older than 910 days, the loan may be subject to “cramdown”. This means that your lawyer may be able to file appropriate papers within your Chapter 13 bankruptcy case to modify your loan contract so that all you will need to pay through your Chapter 13 plan is an amount equal to the “value” of the vehicle. A later post will discuss how a vehicle is to be “valued” under the Bankruptcy Code.
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