If you have a vehicle payment that you cannot afford or is putting a strain on your budget, it is important to consider your option of substantially reducing your payments through Chapter 13 bankruptcy by lowering your interest rate and reducing the loan balance. The remedy available to a specific vehicle loan situation depends on the age of the particular loan in question. If the loan was obtained within the last 910 days (2 1/2 years), then your option is limited to reduction of the rate to a reasonable one. If the loan is more than 910 days old, then you can reduce the loan balance and rate, which can drastically lower your payment. Since this is your Federal bankruptcy right, your lender has no say in the matter. The bankruptcy court will effectively require your lender to reduce how much you are required to pay because they are charging too much under the bankruptcy standards; the court will order reduced payments against your lender’s will.
Different From Chapter 7 Reaffirmation and Redemption
Reduction of your payments in a Chapter 13 case is different from a reaffirmation or redemption in a Chapter 7 case. In order to keep your vehicle in a Chapter 7 you must either agree to the existing loan terms through a reaffirmation, or purchase the vehicle at retail value through a redemption. When it comes to reaffirmation, lenders will rarely if ever voluntarily agree to a rate reduction; it is not very useful for reducing payments. Redemption is more helpful. When you redeem a vehicle through Chapter 7 redemption, you can lower your payment by obtaining a new loan (called a redemption loan) from a bank that lends to people in bankruptcy for that purpose. But redemption loans carry high interest and unless the redemption loan is going to be much smaller than the existing loan (a situation when you are largely upside down), the redemption may do very little, if anything at all, to lower your payments. Chapter 13 provides much more powerful vehicle payment reduction options.
How Does Chapter 13 Vehicle Payment Reduction Work?
When you file for Chapter 13 relief, you will be repaying some or all of your financial obligations through a court-ordered repayment plan that is managed by a court-appointed bankruptcy trustee. Your existing vehicle loan will be paid through this repayment plan, which is called a Chapter 13 plan. Once you file Chapter 13, you stop making payments to your auto lender and instead start making a monthly Chapter 13 plan payment to the bankruptcy trustee. The trustee takes your plan payment, and distributes the funds to your various creditors according to how your plan is structured and as approved by the court. The amount that you must pay for a vehicle through a Chapter 13 plan depends on the age of the loan.
New Vehicle Loan
For newer loans, which refers to those obtained within the last 910 days (two and one-half years), the interest rate will be lowered to a reasonable rate. This can substantially lower your payment depending on the existing rate that you had before you filed bankruptcy. Also, you can spread the payment over another five years, which can further lower your monthly obligation.
Older Vehicle Loan
For older loans, which refers to those taken our more than 910 days ago, the loan balance will be reduced to the value of your car or other vehicle. Because many people owe more on their loan than the value of their car, paying off the value instead the outstanding loan balance can and usually does result in lower payments. In addition to lowering the balance, you can bring the interest rate down to a reasonable one. Finally, you can spread the payments out over five years, further bringing down your payments. The combination of lowering the balance, lowering the rate, and spreading out the payments over five years can result in a drastic reduction in your monthly obligation.
Title loans often have unconscionable rates of interest, sometimes as high as 99%. The other day, a new client called me and was concerned about a title loan where he had borrowed $5,000.00 and secured it against his automobile that he needs to get to and from work. He obtained the loan on unfavorable terms because he had an emergency and needed the money. He was paying over $400.00 per month. His payments amounted to approximately $5,000.00 per year, for five full years, with total payments of approximately $25,000.00. The loan required him to pay five times the amount he borrowed! In a Chapter 13 plan his payments will be approximately $100.00 per month and his total payments will be approximately $6,000.00, a savings of $19,000.00! Of course a title loan is an extreme example of an egregious loan but it serves well to show what a powerful tool Chapter 13 can be when applied by a knowledgeable bankruptcy lawyer in the proper situation.
High Interest Auto Loans
High interest auto loans can also see huge benefits from Chapter 13. Many buyers are pressured into signing vehicle loans with unfavorable terms. These loans can really put a strain on one’s budget. Some dealers even prey on people with less than perfect credit, often placing them into high interest loans that carry a rate of 20% or higher. While these scenarios are accepted in the lending world, they are deemed unreasonable and not allowed by the bankruptcy court in a Chapter 13. By achieving a reasonable rate of interest, for example 7%, you can save hundreds of dollars a month and thousands of dollars a year.
Talk to a Bankruptcy Attorney
If you have a high interest vehicle loan, or you owe more on your car than the value, it may be the case that you are paying too much and your payments are higher than they should be. You may be able to save hundreds of dollars a month and thousands of dollars a year through a Chapter 13 repayment plan. Utilized correctly, Chapter 13 can help you get out of debt and save money on monthly expenses. Before making another payment, talk to a bankruptcy attorney about your vehicle payment reduction options. Reduce your car payments and have more cash in your pocket for other necessities of life.