Should you keep your car in Chapter 13 bankruptcy?
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While it’s more common in Chapter 7 bankruptcy to surrender an unaffordable home or vehicle, it’s also possible when filing Chapter 13 and is something you should consider when meeting with your North Carolina bankruptcy attorney to discuss your debt dilemma. Here’s a look at how surrendering collateral property will impact your Chapter 13 repayment plan.
When Should You Consider Surrendering Property?
There are a couple of circumstances when you should evaluate the benefits of surrendering property that serves as collateral to a loan. First, if you can’t afford the payments on the loan, that’s a sure sign you should considering divesting yourself of the property. Second, if you have no equity in the property and keeping it is wrecking your finances, you should also consider giving it up.
If both circumstances are in play such that you can’t afford the payments and have no equity or negative equity (when you owe more than it’s worth), then it’s time to change your situation. However, if you have equity but can’t afford the payments, you might want to try to sell the asset to satisfy the debt. In some cases, though, a sale might not be practical, so consider your options carefully.
What Happens When You Surrender Property?
The first step is to discuss the process of surrending property with your North Carolina attorney. The creditor must be notified so that they can take possession of the property. Once that’s done, the creditor will auction off the car, home, boat, or other item. The proceeds from the auction will be applied to the loan balance.
The remaining balance (called the deficiency balance) is then considered unsecured debt rather than secured debt. In Chapter 7 bankruptcy, the deficiency balance is automatically written off. In some states, deficiency balances are not enforceable but they are in North Carolina, so it is wise to handle the debt in bankruptcy. These balances are lumped in with the total unsecured debts such as your credit cards and medical bills.
Will Surrendering Property Change Your Plan Payments?
Giving up your property could change your three to five-year repayment plan, but it probably won't because the plan is designed to consume all of your disposable income. And at the end of the plan, any remaining unsecured debts will be written off. However, you might want to consider converting your Chapter 13 plan to a Chapter 7 if you qualify.
Chapter 13 bankruptcies are helpful when you’ve fallen behind on secured debts—such as a home or car loan—and need time to catch up on the past-due balance. But if you find there’s no reason to hang onto the asset and fight to catch up on the past due balance, then converting to Chapter 7 may be a faster route to debt relief. Talk to your North Carolina bankruptcy attorney to learn more about converting your case.
Chapter 7 Vs Chapter 13
With a Chapter 7 bankruptcy, if you’re behind on payments for a secured debt like a mortgage, entering into bankruptcy will end in foreclosure of the property (in most cases), but it also blocks the foreclosure for 90 days so you have time to save up money and find a place to rent. Wallowing in debt you can’t afford makes no sense, but if you can recover, Chapter 13 may be able to help.
To find out more, contact the Law Offices of John T. Orcutt for a free North Carolina bankruptcy consultation. Call +1-919-646-2654 now for a free appointment at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.