If your Chapter 13 payment plan fails, you may lose your car!
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One of the great benefits of a Chapter 13 plan is that you can shut down a foreclosure action on your home or the repossession of your car. Since you need your car to get to work and take care of all the tasks of life, it can be devastating if you lose it. Filing a Chapter 13 bankruptcy can help you keep your car if you've fallen behind on payments. But if your Chapter 13 repayment plan doesn't go as it should, you could be back where you started - or worse off.
How a Chapter 13 helps you save your car
If you're behind several payments on your car loan, you're likely getting threatening calls and letters notifying you that repossession is imminent unless you get caught up. Filing a Chapter 13 bankruptcy allows you three to five years to catch up the past due balance. So if you're four payments behind of $350 each, that's $1400, $25-$40 a month will catch you up so long as you keep making the current payments.
But what's an even better benefit is that you can lower the balance of your loan if your car is worth less than your loan balance. For instance, if you owe $5,000 on your car, but the fair market value of it is only $2,500, you can get what's called a “cramdown.” This bankruptcy mechanism lowers your amount owed to the fair market value, can slash your car payments and make it much easier to pay off your car loan. A cramdown is not available in a Chapter 7, so this is a benefit unique to a Chapter 13 bankruptcy.
What happens to your car if your Chapter 13 repayment fails
Chapter 13 repayments can be a challenge to stick to because they demand all of your disposable income. That means after you pay your bills and Chapter 13 plan payments, you likely won't have much (if any) money left over to spend. A budget this tight can be tough for some people and in many cases, it just doesn't work out that a Chapter 13 plan can be successful. If you can't make your Chapter 13 payments and your plan is discharged, you will very likely face an immediate threat of repossession.
Repossession is much more likely (and likely to happen more quickly) after a Chapter 13 plan is dismissed if you had a cramdown. Because the lender will want to recover the asset rather than letting you keep the car for the lower payment amount, they will likely move to take it back. A cramdown is not a refinance, and it will only be a requirement for the lender so long as your Chapter 13 bankruptcy plan is in good standing. But the good news is, there is something you can do to hang on to this benefit.
Conversion of a Chapter 13 to Chapter 7 may preserve your cramdown
Although a cramdown to the lower fair market value balance isn't available in a Chapter 7, you should be able to keep this benefit in one instance. If you convert your Chapter 13 to a Chapter 7 before your plan is dismissed for non-payment, you can salvage your cramdown. You can also add any new bills that you've fallen behind on since your Chapter 13 to your Chapter 7.
However, there is a cramdown caveat when converting from a Chapter 13 to a Chapter 7. To utilize this benefit, you'll have to pay off the balance due. So if you have a car with a value of $2,500 and you've paid $1,000 toward it during the bankruptcy, you must pay off the lump sum of $1,500. Then the car would be yours free and clear. You can't simply make the lower payments and keep the car under the Chapter 7, but can pay the lower lump sum to retain it.
If you're behind on your car loan, mortgage and other debts, contact an experienced bankruptcy attorney like those at the law offices of John T Orcutt. We specialize in North Carolina bankruptcy and are ready to help you deal with your debt dilemma, put and end to debt collection harassment and get the financial fresh start you deserve. Call +1-919-646-2654 for a free consultation at one of our locations in Raleigh, Greensboro, Fayetteville, Garner, Wilson or Durham.