Chapter 13 Bankruptcy May Save Your Car

A chapter 13 bankruptcy is a payment plan bankruptcy. There are many circumstances where chapter 13 can save your car from seizure from a creditor or from a chapter 7 trustee. A chapter 13 bankruptcy plan can save your car and can also reduce car payments, stretch out car payments, and cure defaults.

In Florida, a debtor only has a $1,000 exemption against a motor vehicle. (A renter can now claim an additional $4,000 exemption). If the debtor needs to file chapter 7 and there is a lot of equity, the debtor will have to surrender the car to the chapter 7 trustee or make arrangements to pay the trustee over a relatively short period of time. A chapter 13 plan allows the debtor to payoff the equity over 3-5 years. (One local trustee is now selling cars on ebay for a higher value which creates a greater risk to debtors).

I generally recommend to clients that whenever possible that it is not worth being in bankruptcy 3-5 years just for a car, but sometimes the client really wants and needs to keep the car and prefers the chapter 13 plan.

A chapter 13 plan can extend the term of the car payment. For example, if the payoff is $15,000 and there are 36 months of payments left, the plan can provide that this amount can be paid over 5 years. The debtor can also reduce the interest rate based on a Supreme Court decision. This “Till” rate is now typically 5.25%, which can enable a substantial reduction in the car payment.

The car owner can also reduce the secured amount of the loan. For example, if a car is worth $10,000 but the loan balance is $15,000, the debtor only has to submit a chapter 13 plan that pays $10,000 plus interest. This bankruptcy right became more restrictive when BAPCPA was passed in 2005. The stripping of car loans can only be implemented if the loan occurred more than 910 days before filing bankruptcy. However, there are exceptions to the 910 day requirement that can still permit the loan reduction in chapter 13. Substantial litigation has taken place to apply these exceptions. Contact Fort Lauderale attorney Jeffrey Solomon to discuss whether your car loan can be reduced.

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