Beware car insurance problems during bankruptcy!
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For consumers struggling with their finances and worried about a vehicle repossession on a financed car, bankruptcy can temporarily stop your creditor from proceeding with these actions. However, even after filing bankruptcy, you might face consequences if you don’t take care of your insurance. Here’s a look at the importance of keeping up with insurance requirements during your bankruptcy case.
Types of Insurance Required For Auto Loans
If you own a financed vehicle, there are usually specific insurance requirements in the financing agreement that lay out what type of insurance you need to protect the property. With a vehicle, it’s “comprehensive” insurance—also called “collision coverage”—that must be maintained with a fairly low deductible prescribed in the loan documents.
Comprehensive or collision insurance means that the car will be covered and repairs can be made for even the slightest fender bender. Those who own their vehicle outright can go with cheaper insurance known as “liability” coverage which has a higher deductible and less robust coverage. If you have an accident, liability insurance won’t cover damage to your car, but it will cover damage to another vehicle if the accident is your fault.
Vehicle finance companies require you to maintain comprehensive coverage throughout the financing period of your loan. This is to ensure that if anything happens to the vehicle, it can be fixed so the collateral for the loan stays in good shape. If you don’t keep your insurance up, the lender may repossess your car or they can take out insurance on the car (usually at a high price) and tack it onto your loan value so that you’ll owe them even more money.
Chapter 7 Versus Chapter 13 For Vehicles
Filing Chapter 7 bankruptcy can stop a repossession, but problems can arise if you don’t maintain insurance. With Chapter 13, if you’re behind on your payments, the plan can give you time to catch up on your past-due balance for your auto loan, but you still have to meet certain conditions, and maintaining insurance is one of them. If you don’t keep up the required insurance, the lender can ask to be excluded from the automatic stay that protects you in bankruptcy to seize the vehicle. The good news is, there are options in bankruptcy to make the vehicle more affordable.
With Chapter 13, you can ask for a “cram down” which can lower the balance of the loan down to the fair market value of the vehicle and drop the interest rate to a lower “market” rate if you’ve got a higher APR loan. With Chapter 7, you may be able to purchase the vehicle outright for a lower value. If you owe far more than the car is worth, you can generally buy out the loan for the fair market value, but you have to do so in a lump sum. If you can swing it, this can greatly reduce your costs. Either way, you’ll need to keep up with your car insurance.
Stop Repossession Today
In some cases, repossession might be the best thing for you. If you cannot afford the car payments, even at a lower interest rate, you simply may not be able to afford the car. If you’re planning bankruptcy, you can stop making car payments and sock away that money to buy a used car for cash. The 90-day stay generally stops the repossession, then you can use that window to save up and buy another car knowing yours will be taken. Although no one likes to think about having their car taken, if you’re in over your head and can’t afford it, this could be the best path for you.
To find out about your options for dealing with an unmanageable car loan using bankruptcy, contact the Law Offices of John T. Orcutt today. Call +1-919-646-2654 now for a free North Carolina bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.